| 0:33 | Intro. [Recording date: January 20, 2017.] Russ Roberts: I want to thank those who participated in EconTalk's Annual Survey, which is now closed. I'll discuss the results and your favorite episodes of the year, next week. Now for today's guest. Writer, reporter, and film producer Jim Epstein of Reason, whose recent crazy article on what is happening in Venezuela really fascinated me. And that's our topic for today. Jim, welcome to EconTalk. Jim Epstein: Thanks, Russ. It's a thrill to be on my favorite podcast. And I also want to say right at the outset that I actually first heard about Bitcoin by listening to your 2011 interview with Gavin Andresen. Russ Roberts: Oh, cool! Jim Epstein: And I remember standing in my kitchen, listening to that interview, thinking, 'This can't possibly work.' And, you know, over the course of 6 years, I, through a gradual evolution, including through my reporting on Venezuela, I've come around to the idea that's it's going to actually change the world. But I also say one more thing--which is that in 2011, when you interviewed Gavin, the price of a bitcoin was $.90. So, I also wish I'd purchased a few. Russ Roberts: You're not alone there. I have a friend, a very wise adviser friend who mocks me constantly for my failure to purchase at that point. Hindsight is 20-20, though, and we don't keep track of all the times we didn't buy the things that didn't go up. But it is somewhat unsettling. We don't do investment advice on this program, of course, so consult with your adviser for what the right activity is for yourself, those of you listening out there. So, this is partly about Bitcoin, but it's about lots of things, which is partly what makes it such an extraordinary story. When I tell people I'm interviewing you about this, they go, 'You're kidding. This is so bizarre.' So, the background for the story is the Venezuelan economy, which people may have heard hasn't been doing so well lately. Give us some idea what's gone wrong in Venezuela--not necessarily the causes people argue about, but: What's the state of the economy, generally? Jim Epstein: The state of the economy is--I think the most important thing to mention is that for a long time, and for many cases now, still, the supermarkets are empty. So you can't really buy food the normal way. And that has to do with price controls. So, an enormous black market has grown up in food. So, it's okay for the middle class. If you are poor, it's particularly difficult. You can wait in line for a long time at a Venezuelan supermarket. But the bottom line is that there's a shortage of food. The hospitals are falling apart. People are fleeing the country en masse. The country's been taken over by violence. The police--the Secret Police, the Federal police--are also pretty dangerous. It's kind of become a living hell. Russ Roberts: And, there's debate about how bad it is. I just want to--and as well as, what are the nature of the policies exactly--the price controls situation is quite complicated; there's been some relaxation of price controls, evidently, outside of Caracas, in the outside regions, in other parts of the country. But I just want to read a quote from The Nation, a Left-leaning publication, an article by Gabriel Hetland, who just gives some facts as well as his own take as to what's gone wrong. He blames it partly on government mistakes, partly on U.S. policy. But that's, again, not our purview in this conversation. I just wonder about his summary of what's happening there. This was written in August of last year (1916): The main features are the following: runaway but not (yet) hyper-inflation, which government sources unofficially put at 370 percent for the past 12 months, and which the IMF estimates will top 700 percent for 2016; multiple years of low and negative economic growth (1.3 percent in 2013, -3.9 percent in 2014, -5.7 percent in 2015, and an estimated -10.1 percent in 2016, according to the IMF, with the Economic Commission on Latin America and the Caribbean forecasting -8.0 percent growth in 2016); a 40 percent drop in imports this year, and a 60 percent drop since 2012; chronic scarcities of food, basic goods, and medicines.... And you may have seen videos of people rioting in the streets over possible opportunity to get food, empty shelves, people in lines for hundreds and hundreds of yards hoping to get basic supplies like sugar, rice, flour, water, toilet paper, etc. It's not a good situation. Crime is a huge problem. There is a lot of corruption in the government, as you've mentioned. And so, what's interesting is in this situation people have come up with some pretty creative stuff. And so, talk about what some of those activities are that you write about in your article. Jim Epstein: Well, I guess I'll first talk--so basically, what's happening in Venezuela is that people are using Bitcoin. And, what is driving this, in part--and we can talk a lot about Bitcoin's unique attributes, what gets around the government's currency controls. But, what's really driving it in Venezuela and causing such a rapid increase in uptake is that electricity in Venezuela is virtually free. It's a token sum that you pay. It's heavily subsidized by the government. And there's an activity, for those who are familiar with Bitcoin, called bitcoin mining, which is: You are participating in the Bitcoin network. Most people who use Bitcoin, the vast majority are not miners. But anyone can become a miner. And when you become a miner, you are helping to kind of maintain and run this decentralized currency network, which is Bitcoin. And you are using a lot of electricity. And in most of the world, it's hard to squeeze out any value in mining. So, when you mine you get paid in newly-minted bitcoins. But, you know, the price of electricity--because you are running your computers at high speeds--you are solving cryptographic puzzles--are going to generate a lot of heat, use a lot of electricity. And that electricity, the cost of it, can sometimes exceed the value of the bitcoins that you receive. So, to Venezuela, where electricity is, you know, virtually free-- Russ Roberts: Artificially cheap-- Jim Epstein: Artificially cheap. If you can set up a Bitcoin Miner--and people are discovering this: it can even be an outdated miner, which is a specially-designed computer, which would be essentially worthless, would get you nothing here in the United States--you can set it up there and you can start making money. And this is in the midst of a country where there's not enough food. Suddenly, you can--it's like having a home mint: There is almost this magical realism aspect to it that, in the midst of this country that's just disintegrating--the economy is disintegrating. You can bitcoin-mine. You can set up a miner in a soundproof room of your house and start making, you know, $70, $80 bucks a month. And that is really changing the lives of middle class Venezuelans all over the country. |
| 8:19 | Russ Roberts: So, a little background. Those of you who don't remember or missed our previous Bitcoin episodes, you can go back and listen to them. We'll put a bunch of them up as links to this episode. But the point you are making is that, this solving of cryptographic, extremely complex computing challenges is the way that the creator of Bitcoin set it up so that it would be difficult but not impossible to generate addition bitcoins; and that the amount that would be generated would increase at a decreasing rate till it finally reaches a limit. And so the only thing that keeps people from creating more at any one time is their brain power--their ability to learn how to do this. And, access to computing equipment, with a sufficiently low cost of using that equipment--which is the electricity. So, here we have Bitcoin mining flowing to its cheapest source: which is places where electricity is artificially low. And before we get into--what's especially interesting, what people do with the bitcoin, talk a little bit about the electricity challenge. Because, even though it is artificially low, it often is shut off, for hours at a time, by the government, to conserve the cost, to keep the cost down of providing cheap electricity. Jim Epstein: Well, I mean, Venezuela has an awful electric grid. So, you know, they are--and they also primarily also rely on hydroelectric power; there have been electricity shortages. It's like everything else in the economy. The infrastructure there, it's falling apart. They've had 3-day government holidays to shut down the office buildings. There's been rolling blackouts in some parts of the country. So, yes, there are electricity shortages. However, in many parts of the country, there haven't been shortages. Miners are also--they are very savvy. They do things like they rent office space in industrial areas of the city where the electricity supply is more constant. There are definitely miners who are dealing with constant outages and it decreases their earnings from their mining activities. But it's not to the--you know, it's still an incredibly profitable venture, if you can learn about it and start doing it. Russ Roberts: And just as a footnote, I also should have mentioned that when people list the causes of Venezuela's problems, the fall in the price of oil has been very hard on them. And also, of course they are not the only country that has had to face that. And their economic situation I think is really due to really poor economic policy. But people debate that. |
| 11:07 | Russ Roberts: So, some creative people have gone out, acquired computing equipment, taken advantage of the cheap electricity price, and produced bitcoin--a currency that is not inflating at 300% or 700% a year. What are they doing with it? What's the thrill? A lot of people would say, 'Well, what can you do with bitcoin? What good is that? You can't use that in the grocery store?' In Venezuela, it's true that the shelves are empty; but there are black market opportunities where you could make, acquire stuff. But those people don't take bitcoins. So, what are they doing that's--um--with the Bitcoin? Jim Epstein: Well, Bitcoin is the first successful digital currency that runs on the Internet. And that's--if you think about any other digital money--and most of us primarily use digital money at this point--it's routing through the traditional financial system. There is a third party involved. Generally a third party that is involved with the government. That's not true of Bitcoin. There is no third party. You are interfacing with this decentralized-- Russ Roberts: No Federal Reserve-- Jim Epstein: There's no Federal Reserve. There is no bank, actually. And nobody can stop you; nobody can control it. Nobody can set the price. It's a complete free market in currency. And it's sort of an amazing technological feat that this is possible. And it's secure. But, so, in Venezuela, in 2003, Hugo Chavez, I think it was an oil strike that initially prompted this, put in place currency controls, setting up a fixed exchange rate. Currently there are three levels. I believe the most advantageous level is about $1 U.S. dollar for 660 Venezuelan bolivars. On the black market, sort of free market rate, it's more like $1 U.S. dollar for 3700 bolivars. So, nobody wants to participate in this fixed exchange rate. But because the traditional financial system--and, you know, Venezuela has a modern[?] banking system--it is forced to abide by this government exchange rate. And as a result, your money is worthless. You can't buy stuff out of the country with your bolivars. Nobody will take it. There's a little bit--if you cross the Colombian border, you can use cash; and there is to some degree a free market, a free exchange rate. And that's actually how we know the black market rate, through the, on the exchange houses, on the Colombian border, where you can do an exchange with cash. But for most of the country--and if it's digital--you can't do it. So, Bitcoin, what it does, it's a complete borderless technology. It doesn't matter where you are in the country when you pay. Where you are in the world when you pay someone in Bitcoin. It is--it is essentially circumventing these currency controls. And it's allowing Venezuelans to spend their money abroad. And they are very specifically, a lot of them. And, you know, I've talked to many, many miners who are using Bitcoin in this way. They are, um, buying groceries from Amazon.com. There is an industry of courier services in Miami, who are, who pre-date the currency controls and who are very sophisticated in bringing packages into the country. They are routing their Amazon orders to these warehouses, and then having the food--often canned goods, rice, corn meal, non-perishables--delivered straight to their homes. And now--of course, the first thing you might say is, 'Well, Amazon doesn't accept Bitcoin.' It doesn't matter, because they use--there's a couple of services--there's a site called eGifter, where you can buy an Amazon Gift Certificate with bitcoin. There's a great company called Purse-io, which allows you to use bitcoin to buy things on Amazon through an intermediary. This also, actually, makes me thinks me think back to your conversation with Gavin Andresen in 2011, when there was a--you guys were discussing, as I recall, some kind of concern about: 'Nobody takes Bitcoin. What is this worth?' What we found out since then is that it doesn't matter that much. Because if you have a Bitcoin Credit Card, at the point of sale it's converted to fiat dollars. There's so many services that will convert your Bitcoin to traditional money that the fact that any one vendor doesn't take it doesn't matter. Russ Roberts: Yeah, there's virtually exchanges where you can move back and forth between bitcoin and dollars. At least right now. There's always still a question whether that's going to persist. We've talked about this before; but I'll also mention in passing: There's nothing "behind" Bitcoin. It's just--it has value as long as people think it has value. There are a lot of people out there who want it to have value. That's not quite enough; but it's getting us there. It's important to remember that the U.S. Dollar isn't backed by anything real. It does have the advantage, though, that the U.S. Courts will settle disputes about contracts made in U.S. dollars. And you can pay your taxes in U.S. dollars. That automatically creates a viability for being paid in dollars, that, in many ways, along with some vague level of trust, creates the value of an usefulness of accepting dollars in your paycheck. But, Bitcoin is using a different--but not totally unrelated method--of, well, 'If people think they can be useful somewhere, then they are.' At least for now. So, people are--I mean, this is just a mind-boggling piece of economics. It just is--as a microeconomist it just utterly fascinates me that price controls, in Venezuela, on food, means there's not much food, or none in many cases on the shelves. Price controls on electricity, and subsidies, means that it's really cheap to use electricity. People have enterprisingly gone out and are generating bitcoin with that cheap electricity, to import food from America. It's mind-blowing. Now, the government-- Jim Epstein: And I credit my Reason Editor, Peter Suderman, for helping come up with this formulation, in terms of--what we say is that it's turning Socialism against itself. Russ Roberts: Right. It's an end around, exploiting a piece of the system--the subsidy of electricity. It just, it's just extraordinary. |
| 17:35 | Russ Roberts: So, the government doesn't like this, though. One question would be why? People are literally hungry there, it appears. It's hard to know exactly how bad it is, by the way. You are painting a very negative picture. I think it's pretty negative. I don't know if it's as negative, and--scary, despairing--as you suggest. But it's clearly not good. But, you'd think the government would be happy that people found a way to get some food into the country. Why are they cracking down on it? And talk about how they are cracking down. Jim Epstein: Um, well, they are not--they are cracking down in part. They could certainly go farther. And, you know, one thing--so this was, early last year the government, the state-owned media issued a report that Bitcoin is terrible; it's used by criminals. The same kind of thing that people in the United States use to speak negatively about Bitcoin. And then, right after that, a handful of Bitcoin miners were arrested, on a number of charges, one of them being electricity theft. Because, on the--you know, one miner in particular who I interviewed ended up spending 3 and a half months in prison, whose name is Joel Padron, was told by his arresting officers that, you know, he was taking advantage of this free resource, the electricity that the government was giving him, to generate currency. To line his own pockets, essentially. So, a number of miners were arrested. It was reported on in the state-owned media. And the effect was to allow the SEBIN (Servicio Bolivariano de Inteligencia Nacional)--which is the Secret Police in Venezuela--to go to other miners and essentially extort them. And I spoke to many bitcoin miners who knew of other miners with direct experience who were paying tribute to the police in order so that they could continue their activities. Because, you know, again, the police officers are also living in this country. They--you know, they are facing the same empty grocery stores. So, really what it's done is created this kind of extortion racket. The government could go farther. There is an exchange in Venezuela called Surbitcoin. It's the largest exchange--it's actually run out of Brooklyn, New York. And they, essentially, it's like any other exchange. You can exchange your bolivars for bitcoins. And they are in partnership with Banesco, with one of the big banks in Venezuela. Which allows you to do this digitally. They actually--they have a very good relationship with the bank. Many of the people at the bank are actually their customers. The government can certainly come in and say, put an end to this and shut down Surbitcoin. That wouldn't actually stop Bitcoin, because Bitcoin at its core, and we can talk about this if you want, is a peer-to-peer technology. So, the exchanges aren't necessary. But the government could do more. And they probably will eventually do more, as this continues to scale. It's still--most Venezuelans aren't mining Bitcoin yet. People hear about Bitcoin. People whisper about Bitcoin--this strange technology where you can kind of create money with computers. A lot of them don't understand it. Russ Roberts: They are not alone. It's hard to understand. Jim Epstein: When I was doing the reporting on my piece, Surbitcoin, its volume was increasing at about 20% a week. It's growing so rapidly. If you go to the big peer-to-peer Bitcoin trading site, a wonderful company called Local Bitcoins, they make all of their data available--you'll see the incredible growth in bitcoin use every week in Venezuela. I think that, as it grows, you probably will see more of a government backlash. At this point, it seems mainly as a way, driven by the Police, to sort of set up this extortion racket. Russ Roberts: As you were talking, it reminded me--we mentioned that bitcoin--it was $0.90 for one bitcoin. Do you know what it is right now? Roughly? Jim Epstein: Yeah. It reached up to $1000 right around New Year's, and it was dipping down to $800. There's a lot of rumors coming in from China-- Russ Roberts: Right-- Jim Epstein: Which are affecting it a little bit. In the $800 range, I believe. Russ Roberts: Yeah. But it moves around a lot. But a 90-cent investment would have turned out pretty well. If you sold now. It may turn out to be pretty worthless eventually. |
| 22:14 | Russ Roberts: So, the government has cracked down some. You mention a Facebook Group--another example of how the Internet circumvents some government activity. There's a Facebook Group for Venezuelan Bitcoin Miners. Talk about what it has on there and the degree that people that people have to go through to maintain their anonymity. Jim Epstein: Yeah. Well, it's a secret Facebook group. When, as I mentioned earlier, when the state-owned media started coming out with negative Bitcoin stories and some miners were arrested, some of the moderators of the group--controversially, actually, because it's really slowed growth of the group--it was growing enormously before that--they changed the settings in the Facebook Group to make it Secret. Which means that you not only need an invitation: You won't even know it exists unless you get an invitation into this group. And a source did add me. And I will say, also, many of the people who are in this group fully suspect that there are members, you know, of the Secret Police who are part of this group. So they still often use secondary profiles and so forth. But it is--what the kind of leading person behind setting up this group, a guy named Randy Brito, 21 at the time, and a real Libertarian, also, set up--he lives in Spain; his family fled Venezuela years ago--he set up the group in part to kind of teach people about Libertarian economics and so forth. And it didn't go in that direction, interestingly. Most people don't seem to be particularly interested in talking about ideology or economics. Russ Roberts: I noticed. Jim Epstein: They are interested in this group. They are interested in selling stuff. It's kind of an online bazaar. And to me it shows--it makes me very optimistic about Bitcoin, because this is a community that is using Bitcoin, not like many of the users here in the United States, not for ideological reasons, but because it's making their lives better. So, people are--every day you see listings for--I just saw one for tires, cars; I've seen houses; toilet paper. Anything where they are offering it for sale, they'll send it to you and you'll send them bitcoin in return. Seems sort of inefficient, but there's a lot of participants in this group. People are also selling bitcoin to each other in exchange; it also to some degree serves as an exchange. There's a reputational aspect to it: People give each other recommendations--say, 'Have you done business with this person? Who can say that this person is trustworthy?' Etc. Russ Roberts: Is there also information, clearing, they are going on about how Bitcoin is working or what the government is doing, or that kind of thing? Jim Epstein: Very little. Very little about that. People don't--and I imagine, it also, getting back to the idea that it's sort of monitored. People don't want to speak freely in this group. They don't know who is reading it. It's really about commerce. Russ Roberts: Interesting. |
| 25:17 | Russ Roberts: Now, you point out--one of the aspects of Bitcoin I think that make some people uneasy, including myself--you can't touch it. It's purely digital. I have a little bit of bitcoin. It's sitting in a digital wallet somewhere. In theory I can get at it when I want. But it feels different from a bank. Even though a bank, my money in a bank, or it's Schwab, Charles Schwab, it's also digital. There's no real pieces of paper there in the account. But it somehow feels different. There's nobody to turn to if I feel I've been mistreated--which there is in the case of Schwab. If Schwab defrauds me, there's some legal recourse I have. With Bitcoin, it's a little bit of the Wild West. So, that's usually--it turns people off. But as you point out, one of the advantages in Venezuela, because of the crime rate, is that it's harder to steal. Jim Epstein: Well, that's right. I mean, you know, the classic refuge from inflation in Venezuela and in other Latin American countries as well has been the U.S. Dollar. However, unless you are lucky enough to have a U.S. bank account--and there are some Venezuelans who have spent time in the United States and are that lucky--you can't really keep your money, you can't keep your life savings in dollars. There's no way to do it. You can keep cash. There's been a real shortage of U.S. dollars within Venezuela because of the currency controls and so forth. Of course, though, if you keep cash in your house, you could get robbed. And that happens all the time. I mean, this is a country that really has been besieged by crime. Caracas--nobody really goes out after 8 o'clock any more. Russ Roberts: I want to talk about that in a minute, but I want to stick with this for a second, because I've got to read this quote, because I just love the quote. This is from your article. You say, "Since bitcoin has no physical properties, it's also harder to steal. Venezuela still has a robust black market in U.S. dollars, but storing greenbacks"--that is, U.S. dollars--"is risky in a country besieged by crime. 'Burglars smell the Benjamins as if they were hunting dogs,' says Hector, a physician turned bitcoin miner." That sentence--"'Burglars smell the Benjamins as if they were hunting dogs,' says Hector, a physician turned bitcoin miner." The whole thing is great. The imagery is fantastic; the alliteration of burglars and Benjamins--and then you've got a physician who is bitcoin mining because it is presumably at least as lucrative as being a doctor in Caracas--it's kind of sad. Jim Epstein: Yeah, a physician who is a 44-year old bitcoin miner who has totally given up practicing medicine because essentially there is no money in it: he can't get paid any more. Russ Roberts: Now let's turn to the nighttime situation, because that's an incredible story, just the example of the breakdown in civil society is terribly tragic. Talk about what happened to one of the people you talked to, in a kidnapping situation. Jim Epstein: Yeah. A bitcoin miner, I called him Luis--I used pseudonyms for many of these people. I interviewed them on the condition of anonymity because there's obvious incredible risks in terms of being caught doing this activity in Venezuela. He--I tell him--he's the story of what's called an express kidnapping. He was driving in Caracas with his girlfriend. He was pulled over; guys with guns got out. One of them, I believe, had a grenade. They held him hostage. And his father ended up making a payment, giving them, I think, about $6000 that he gathered up from neighbors frantically in the night, and getting this person, this minor, released. They didn't actually know that he was a bitcoin miner: it doesn't seem that they did; though because of his mining activity he was actually able to reimburse the people that put money forward to help him get out. And this guy is a young guy; he's very tech savvy--the exact kind of person, and I spoke to many people for my piece who are just like this--that you'd think Venezuela's future sort of rests on. They would be an enormous asset to the country. And even though they are getting by thanks to their bitcoin mining activity--some of them are doing quite well--they are getting out of there, because it's just no place where you want to live, raise a family. So, the number of people that--anyone who can, really seems to be making plans to leave at this point. Russ Roberts: Yeah. I don't really know what's going to happen, policy-wise. To change that--seems like just a really bad situation. But that kind of breakdown--that's not a rare event, evidently--I wouldn't say it's necessarily common. I have no idea. But the fact that it's happened at all is so distressing and must be so distressing to people who are in those circles. It's just terrifying. And just as you say, terribly sad--sad because of the human toll; partly because it means the country is going to lose some of the more talented people who might be part of its future. |
| 30:32 | Russ Roberts: Let's think for a minute just about that government crackdown, or the fear of being arrested; the fact that people use pseudonyms in your story. You talked earlier about this. How bad is it? Are they just worried because some bitcoin miners have been arrested? Or is it getting worse? Do we have any idea about that? Jim Epstein: You know, I'm staying in touch with these people; I've heard some worrying reports recently about a few more crackdowns in miners. It depends a little bit on where you are in the country: in Valencia it's worse than in Caracas. The police--it's sort of regional to some degree, so the attitudes are different. I wouldn't say, the vast majority of miners have not gotten in trouble. It's hard to know how many are being extorted. But also we don't know what's going to happen. I think a lot of people expect that the food and the economic situation could only get worse. These people are going to become--they really become targets. And, you know, spending time in a Venezuelan prison is not something you want to do. It's just a terrifying place, because the rule of law has completely broken down. Russ Roberts: Again, I just wonder how bad it really is. I'm interested if there are any listeners out there who are in Caracas right now or have visited Caracas lately. A lot of times--I always think about Israel which I visit a couple of times a year. Israel is a beautiful country, and whenever I go, people say, 'Aren't you worried?' And of course there's always the risk of some danger. But Israel is an incredibly safe country. My niece lives there and her kids run around much more freely than my kids ran in the United States, without fear. And there's a certain disproportionate media coverage of violence and tragedy there that people are thinking it must be like a war zone. Well, it's nothing like a war zone at all. For all I know, places that I think of as a war zone, like Beirut--maybe life is normal there, too. So, Caracas, when people talk about how "horrible" it is or how it's falling apart, I suspect most of the time most people are leading somewhat normal lives there. But I've no way of knowing; I'd be curious if anybody out there knows about that. And Jim, if you want to comment on that? Jim Epstein: Yeah, I mean, possibly before 8 p.m. I've spoken to many people who told me that you cannot go out after night. The city, this enormous city, just dies at night. And I think that's sort of one of the really big changes. Also, Caracas is the murder capital of the world. It had a terrible crime problem before the most recent economic crisis. But it's certainly made things much, much worse. Russ Roberts: We're going to move on and talk about other applications and activities going on in Latin America. Before I do, I'm just curious: Where did you get the idea for this story? This particular crazy mix of price controls and subsidies and entrepreneurship? Jim Epstein: Yeah. Well, I actually was in Brazil doing reporting on a couple of different stories, and I ended up meeting with and interviewing members of the Bitcoin community in Brazil. And there's actually, and we can talk about that in a moment--there are actually some parallels to what's happening in Brazil with Bitcoin and what's happening in Venezuela. And it was through a contact there named Fernando Ulrich, who is really a terrific writer about Bitcoin. He's a Brazilian who turned me onto the fact, just in conversation, that Rodrigo Souza, who runs Surbitcoin, the biggest Bitcoin exchange in Venezuela, works about a mile from where I live in Brooklyn--that he's actually in Brooklyn. Russ Roberts: That's a good story[?], too. Jim Epstein: Again, it points to the fact that this is a borderless technology; it doesn't matter where you are. And Rodrigo is--he actually runs a company called Blinktrade, a former NY Stock Exchange software developer who has mimicked the kind of exchange, broker-exchange relationship that the NY Stock Exchange has, where he runs, he has a liquidity pool; he runs the software; and then he interfaces with a variety of countries: Vietnam, Brazil--he runs the biggest exchange in Brazil--Surbitcoin in Venezuela; there's an exchange in Chile. And there's sort of--there are local brokers who are essentially hooking up his exchange to a bank. And that's sort of how this technology works. And it's right here in Brooklyn. Russ Roberts: And allowing people to trade in their own domestic currency from bitcoin, which would otherwise be--when you land in Caracas and you go to the--if there is a foreign exchange window there; I don't know if there is--but there is usually a Bitcoin opportunity there. Jim Epstein: Well, and I was just going to say, also--when I started to talk to Rodrigo--and he was telling me, again, probably some people who first hear about this: I was having trouble wrapping my head around it--and, you know, how people are mining in Venezuela? I mean, isn't there an electricity shortage there? Anyway, Rodrigo led me to a bunch of other sources and then this story started to unfold. |
| 36:16 | Russ Roberts: That's very cool. So, you mentioned Brazil. Talk a little bit about Brazil if you'd like. Or other places. What else is going on in Latin America, and to what extent does it mirror what's going on in Venezuela? Obviously, not every country has price controls and empty shelves and therefore people are importing food from Miami. But there are some situations where public policy in Latin America, and Bitcoin is involved in those. What's going on? Jim Epstein: Well, okay. So, Brazil--I believe it's the biggest Bitcoin market in Latin America. There's a lot of currency speculators. Foxbit is the big exchange. The practical use, though, is similar to Venezuela. There are not the same currency controls. There is not a fixed exchange rate. However, there is an enormous amount of protectionism. So, if you want to import--if you want to buy an iPhone or an Apple laptop in Brazil and bring it into the country, you are going to pay a tariff equal to--it can run as high as 60%. If you want to bring money into the country--and these are very complex rules for exactly how much you'll pay--but you might end up paying an income tax and bringing that money into the country of about 27.5%. If you are a Brazilian and you want to use your credit card to buy something from the United States, or you come to the United States and you want to use your credit card for your hotel, you are going to pay a 6.38% fee on everything you buy. So, there's an enormous amount of protectionism, sort of. Bitcoin, similar to how Venezuela, it allows you to route around the fixed exchange rate--Bitcoin allows you to route around these punitive taxes. So, for example, if you want to bring an Apple laptop into the country, you get whoever is selling it to you to write you a bill of sale for maybe half the amount, something to show at Customs. You pay the tax on that amount. And then you pay the rest of the bill in bitcoin. And you pay nothing. Russ Roberts: So, let's try to understand that. That's a little puzzling to me. So, let's say--there are a number of ways I could buy a foreign product in a country. I can go to a store that has imported it for me; and usually a store has trouble avoiding, evading tariffs, because they've got a concrete, brick-and-mortar presence and they've got to pay taxes and they've got receipts; and it's just a little more challenging to smuggle goods in. But, I can also--you know, I can just have somebody ship me--if I have a relative in America, I can ship it. And of course that product shows up at the border--that package--and they inspect them, and things get confiscated or taxed at the border, depending on what's in them. So, I don't understand how Bitcoin is helping me--I mean, I can kind of direct order it. I don't know if Apple sells direct order to Brazil or other companies do. But how is Bitcoin helping me? I don't quite understand that. See if you can help me understand that, again. Jim Epstein: So, Apple, I don't believe would direct-order to Brazil. But, you know, you'd have a third-party company working with Apple that might do that. And, in terms of, bringing that good into the country, when that laptop or phone or whatever you are buying from that re-seller in the United States--that item has to cross Customs. And you need to produce a Bill of Sale. And the Bill of Sale will show how much you paid. And they are going to make sure that you have paid the tax, the import tax. You have paid the tax, the import tax. Right? So, um, because it's a good, you can't pay for the item through Bitcoin, through this, by circumventing it. So you have to pay for part of it. At the border. But then, with Bitcoin, what you can do is you can pay half of it. You can work out a deal with the reseller--and there are many Brazilians who are doing this sort of thing--work out a deal to make up a Bill of Sale for half the price. And then you are going to--it's tax evasion, essentially. Russ Roberts: Yeah. Let me see if I can get this. So, I'm the reseller. I'm selling you a--a $2000 computer. So I need $2000 from you, the buyer, in Brazil. I declare it as a $1000 computer. You pay me $1000 in cash. In dollars. But you are saying the other $1000 shows up in Bitcoin as an unobserved transaction by the Customs' people. So, the Customs' people see a computer. They see a bill of sale for $1000. They go, 'Okay, that's reasonable.' And then it goes through. And so you only pay the tariff on the $1000 rather than the $2000. And that's what's going on. Is that what's happening? Jim Epstein: Yeah, it's correct. And because you are going through a Bitcoin exchange--in the case of Brazil it's likely going to be Foxbit--it's not going through the banking system. So it's unobserved. Russ Roberts: Untraceable. Jim Epstein: It's--right. It's not traceable. It's not--same thing with just moving money into Brazil. Where you might be hit depending on the amount, it's fairly complicated. But you might be hit with--if you want to, if you are a company and you want to pay some employees in Brazil, you might pay a 27.5% tax on that. Well, you can actually route all that money through a Bitcoin exchange; and then you are not working through a bank bureucracy, which is a sense is in partnership with the Brazilian government. So therefore you are circumventing that tax. Now, you might say, 'Well, why doesn't the Brazilian--this is happening out in the open? Why doesn't the Brazilian government crack down on this and stop Foxbit from this use?' Well, first of all, it's hard to know why someone is using Foxbit, what they are doing with it. You know, what--are they just making an exchange for other reasons. So that's hard to tell. They could shut down Foxbit entirely. They could do that. But again, Bitcoin--and this is one of the reasons I'm so optimistic about Bitcoin--it is at its core a peer-to-peer technology. And the technology around Bitcoin has been improving so rapidly that in the near future, these peer-to-peer transactions will be as convenient as working through one of these exchanges. And when Bitcoin is truly peer-to-peer, as it was intended, if you go back to Satoshi Nakamoto's original paper, it is very, very difficult, virtually impossible for anyone to interfere with the movement of money. Um, and that is, um--that was--short of shutting down the Internet. |
| 43:16 | Russ Roberts: But I'm curious how the--I'm thinking about that reseller. They can't--do they advertize? This computer is $2000. But if you paid it with $1000 in bitcoin, it's only $1000. How does that transaction, how does information about this opportunity happen? Or does the seller, does the buyer call up and say, 'Well, the price is $2000. I'll give you $2200, actually. But only $1200 of it will be in--$1000 of it will be in cash and $1200 will be in Bitcoin. We'll both be better off. Because we won't have to pay the tariff. Jim Epstein: Well, for example, the company called Bit.One, which is moving money into Brazil to get around the tax--they are, I believe, using the Foxbit exchange. What it is, is that there are some companies to facilitate this process. It's not advertised. It's word of mouth. More people in the know are learning about it. And it's not--at this point, I think that big a phenomenon. Russ Roberts: Yeah, I guess-- Jim Epstein: Growing. It's really kind of--what interests me so much about it is what it points to. The potential. Russ Roberts: Right. And of course, like you, given our philosophical preferences, I love the idea that--other people would say that, 'Well, that's horrible. They are smuggling. They are breaking the law. And shame on them. And the government should crack down on it.' What are your thoughts on that? Jim Epstein: Well, I would also say to those people that, um, that there has been a black market in getting around these punitive tariffs already. Bitcoin is a much safer way of doing it. Makes me think a little bit of Silk Road. You know, the Online Drug Bazaar. Which was ultimately shut down by the Feds. You know, it made selling drugs kind of safe and reliable online. You take that away and you give it back to sort of a less predictable, more violent spear of--economy--you know, actors. Russ Roberts: Of course, my recent interview with Sam Quinones on Dreamland suggests it was some innovations in the deliveries of drugs that are less violent. It's not that comforting, given what it seems to be leading to. But that's a different topic. |
| 45:29 | Russ Roberts: Let's talk about the underlying technology of Bitcoin and some of the applications you've noticed in Latin America. Again, it's a fascinating example of an end-around an ineffective or corrupt government system. So, underlying Bitcoin is the Blockchain technology. Describe that, and talk about how people are using that, outside of Bitcoin. Jim Epstein: I think the easiest way to understand a blockchain is it's a database that nobody controls but everybody can trust. It is--it is the--right, it so it sort of undergirds Bitcoin. It's basically the ledger. It's similar to the ledger that your bank would hold about when--when Jim Epstein pays Russ Roberts, you know, through a bank transfer, the bank transfer is updated. In the same way, the Bitcoin ledger lives on this database, call it a blockchain. And it has this ingenious architecture, which allows it to be distributed. So, um, there are copies of the blockchain on computers all over the world. They are updated every 10 minutes with the most recent transactions. You can search any transaction. It's completely transparent. It can't--what is in the blockchain can't be changed. It's cryptographically protected. So, this, what, pretty soon after Bitcoin arrived on the scene, a lot of very smart people figured out that you could use this underlying this technology of the blockchain for all sorts of applications separate from exchanging currency. Um, and some of the most exciting applications are in a place like Latin America. You know, what excites me most is actually this idea of putting Land Titles on the Blockchain. I live in New York City. There is a data base we have called ACRIS (Automated City Register Information System) that's run by the City of New York. You can look up who paid what for what plot of land, and you can check out the history. And it's--it's trustworthy. It's not really a problem. Bitcoin doesn't solve any problems here so much. But then you take a country like Honduras, where--and I haven't done my own reporting, but I am told that land records were kept on dusty books in a government office. You could have people come in and cross out a name and put a different name down. Very difficult to figure out who owns what. It's a complicated legal process. And many of your listeners might be aware of, there's a book called, The Mystery of Capital, by Hernando De Soto, where he talks about this problem in Peru, of insecure ownership of land. And how detrimental that is to an economy. The historian Sam Bass Warner once said that the most important thing that a government does is keep track of who owns what land. And the fact of the matter is, is that outside of the United States the government has done a fairly poor job of doing that. And this has created all sorts of problems. So, the blockchain offers an opportunity to--you can, in a sense, upload the transactions when a piece of land is traded between to individuals to the blockchain. There is some complexity there. The blockchain can't--you can't put all the information into a blockchain. But people have come up with ways of creating sort of digital representations of the information of when one person trades a piece of land with another. So, therefore, you could go onto a blockchain and see, make sure that nobody is coming in and falsifying a record. You can prove the integrity of a transaction. And this has enormous implications. Honduras, which I mentioned--there's a great company out of Austin called Factom which was close to a deal with the government of Honduras to put their land titles on the blockchain. The project has stalled. There is a project in the Republic of Georgia to put land records on the blockchain. So, you know, it's beginning to happen. There's growing interest in this, at least. There's also--I interviewed a Brazilian entrepreneur who has got a startup that attempts to put notary services on the blockchain. Now, in the United States, notaries aren't really such a big deal. In Brazil, like a few other Latin American countries, every time you do any transaction, you've got to go to a notary, in person, and they are going to check your signature against a book they have of signatures. It's a very arduous process. If your signature isn't in the store where you happen to be, that's problematic. My understanding is it's cartelized to some degree, the right to run one of these notaries has been handed down through generations; you can't break into this industry. And it's one of many reasons that Brazil is I think 122nd on the Economic Freedom Index in 2016. There's just so much red tape that hurts the economy in Brazil. So, the idea there is if instead of checking a signature, you can upload a document, a representation of a document, to the blockchain. You can then later take the document, check the blockchain, and prove that it's the same record. There's some--I'm trying to avoid some of the technical complexity here. But again, the basic idea is that this database that everyone shares can bring the trust that is missing and is crippling to a lot of these economies. |
| 51:23 | Russ Roberts: Well, it's a really interesting example because in economics--well, in policy, we talk very casually about what we call property rights, as if they are straightforward. There's private property--the right to own stuff. And usually what we mean by that is if the government comes along, it won't confiscate your stuff. You won't come home to find that your house has been turned--in the United States--into some house for a government official. And of course we have eminent domain, which kind of a problem, an interference, with private property. It's seizure of property. At least there is the idea that you'll be compensated; it's not always done fairly, of course, and the outcomes are not always healthy. But we have basically what we would call private property in the United States. One more footnote--we have zoning and other things. But when I want to sell my property in the United States, it's pretty straightforward--we don't think of that as a problem. Of course, it is a problem. There is a huge transaction cost with selling a property. Turning a house over, selling it to someone and buying a new house, has thousands of dollars of transactions costs just to prove that it is your house, in deed--literally "in deed"--that you own the house. That the property borders of the house are what you claim they are to the new buyer. And until you've sold a house you don't realize that that's actually quite complicated. Even in the United States, which has a pretty good functioning legal system and a pretty good respect for private property, proving that you own something is not free. It costs. It's expensive. Jim Epstein: Or you have to buy title insurance. Russ Roberts: Correct. You have to buy title insurance. Jim Epstein: I overstated how well the system works here in the United States. Russ Roberts: That's all right: my point is that I'm really challenging the way economists and others talk about private property, 'Well, you can buy and sell stuff; it's great; you have assets.' But the truth is that even in the United States, which has a transparent legal system relative to some other countries, it's very expensive to exchange property, just because you have to prove that what you claim is yours. That you are not a squatter. That you are not living in someone else's house. That the land that you've developed, built something on in the back yard, isn't on your neighbor's property, when it conveys to the new buyer. And so that's just fascinating to me. And of course in a less developed country, a country with a more poorly functioning legal system, that very fact is up in the air. It's like you say--there could be a drawer somewhere of books somewhere with some register or record of who owns what that's very ambiguous. And that has an enormously costly effect--as De Soto and others have explored. So the idea of improving on that, not just a little bit but potentially getting almost all the transaction costs out of that transaction is a fabulous thing. Jim Epstein: Just to chime in on the efficiencies of the system in the United States: If a property has been foreclosed upon and it's being auctioned, in many cases you have to show up if you are interested in that property. You need to show up in person at a certain time and place to make a bid. And have a bank check ready to put down on that. That's another--and of course what that does is it, you know, it severely narrows the market. Many more people might be interested in bidding on that property; the price would go up significantly. Bitcoin and the blockchain are a perfect solution to that problem. Russ Roberts: Well, you call it efficiency: it's just a reality of the fact that there is uncertainty, that it's not always clear that how people represent themselves are trustworthy or reliable. And the legal system is one way--and often the cheapest way--to solve that problem, of getting rid of the ambiguity or the lack of trust that I might have when you represent yourself as a legitimate buyer with credit. And I represent myself as a legitimate seller with the product--that is, the land--that I claim to own. Or that I own it free and clear, which may not actually be the case. So, all this complexity we are talking about, it's just a reality of the fact that the world is complicated. People don't always tell the truth. And of course sometimes it's not dishonesty--it's just ignorance. Sometimes you might not know about that you share a driveway with the house next door, because you never paid attention to it; when you sold the house you didn't tell that person that that was the case. So, these are just realities. What's interesting to me about the blockchain is that it does possibly have the potential to just reduce these inevitable costs to a much, much smaller level. Jim Epstein: I want to mention one more example. To cut to Mexico, there's a company called Volabit in Mexico; actually up till now it's been serving as a Bitcoin broker. And they are now exploring technology to put Mexican promissory notes--which there has to be a physical paper now, according to the rules in Mexico--putting those on a blockchain. So that it's easier to prove that you have a loan. Digitizing, in effect, that. The other--Mexico is also interesting as well--let's cut back to Bitcoin for a moment. You know, Mexico doesn't have currency controls. It's easy to move money--it's easy to do a Remit if you are a Mexican in the United States and you want to send money home to your family in Mexico, that corridor is very well developed. You are not going to pay very big fees. In contrast to Venezuela. And in my piece I talk about one--there's a woman who is sending money home to her family in Venezuela; she was literally having a family member walk cash across the border. Now she's using Bitcoin, because again, it circumvents those controls. But in Mexico, you don't have that advantage, so people were really like, 'Ehh, Mexico is really not going to take off with Bitcoin.' Well, if you look at recent data on what's happening with the exchanges, they are growing at a staggering pace. Actually, with the election of Donald Trump, the volume of bitcoin trades in Mexico went berserk. The Mexican peso has just performed terribly in 2016. And it's hard--just like in Venezuela--it is hard to get your money into dollars. You can't keep dollars in a Mexican bank account. So, bitcoin, although still somewhat volatile, not nearly as reliable as the U.S. Dollar, is a good refuge from inflation. It's also, in Mexico, the people on the exchanges in Mexico have noticed that you have teenagers who want to play video games; they participate in a platform called Steam. They can now pay in bitcoin. People who don't have access to banking infrastructure. And this is true throughout Latin America. Lots of towns in Mexico don't have a single branch bank. People don't have banks. And there's policy expert, trying to figure out: What can we do about the un-banked? Poor people don't used banks. They use check-cashing places. And it's very expensive. Bitcoin is beginning to show signs of a solution to this--that it is a solution to this problem. Russ Roberts: Well, my guest today has been Jim Epstein. Jim, I love your optimism and these little green shoots of possibility for Bitcoin and the blockchain. It'll be fascinating over the next few years to see what comes of them. |
Writer, reporter, and film producer Jim Epstein talks with EconTalk host Russ Roberts about mining Bitcoins in Venezuela as a way to import food. Venezuela is a tragicomic example of how policy can lead to strange and presumably unexpected outcomes. Epstein also discusses how Bitcoin is being used elsewhere in Latin America and the potential for the blockchain technology to lower the costs of owning and transferring property.
READER COMMENTS
rhhardin
Feb 13 2017 at 10:10am
There’s a bitcoin mining opportunity in the US, if you heat your house with resistive heating (as used to be common).
Every watt used for anything, fans, TVs, and in particular computers, makes the furnace run one watt less. Everything except light that escapes out the window turns into heat at a watt for watt basis.
So the furnace is only special in that it does nothing useful with the power before it becomes heat.
So it’s free to run your computer in the heating season. You save the cost watt for watt on the furnace.
Or, of course, any number of computers, up to your monthly heating bill.
This doesn’t apply if you have a heat pump, which is more efficient than resistive heating when it’s not very cold out. Some computation would tell you when to flip on the computers vs outside temperature.
(A 2000 square foot house in Ohio runs an average of 3500 watts continuously to heat, which would be a lot of laptops, around a hundred, if anyone wanted to try for free heating. I wonder how much you’d make in bitcoins; not enough to cover the bill, we know, but what fraction.)
Suresh
Feb 13 2017 at 11:12am
As we are trying to understand what bitcoin means- a country like Venezuela mining bitcoins with their limited resources. This is mind boggling and the kind of opportunities possible with this technology.
Very interesting conversation!
Jim Kee
Feb 13 2017 at 1:16pm
Russ (and everyone), if you have questions about life in Venezuela, check out Hannah Dreier, the AP correspondent there. She’s been living through the crisis and heroically reporting on the descent into utter societal failure. http://www.hannahdreier.com/
Thomas A. Coss
Feb 13 2017 at 2:25pm
Venezuela appears to be entering the terminal phase of a mortal disease resulting from the self-inflicted wound of Socialism. The news is that for a clever few, not just political insiders, Bitcoin allows the government to fail without taking down all its citizens in the process.
This is a BIG DEAL.
China too is seeing that there are limits to currency manipulation that strips savers of the value of their saving. Bitcoin, a classically emergent technology, dramatically alters the calculus of sovereign finance through a relief valve larger than any one country or people.
Economics offers considerable insight into what is going on in Venezuela today, and sadly, how this will play out going forward.
Conrad Barski
Feb 13 2017 at 3:03pm
>But how is Bitcoin helping me? I don’t quite understand that. See if you can help me understand that, again.
I don’t think you got you fundamental question answered, Russ, in terms of what Bitcoin is accomplishing in Brazil:
In order for a Brazilian person to buy something from a US website, you first need to (1) Bring some kind of currency into Brazil that has value in the US and then (2) A Brazilian can use that currency to buy something from a store.
Traditionally, this “currency” is the US dollar, which means there were people specializing in step #1, smuggling paper dollars into the US in exchange for Brazilian goods that are smuggled out of the country. The problem is that a US dollar has limited utility in step #2, since not many Brazilian stores will (legally) accept US currency.
On the other hand, if you use Bitcoin, step #1 becomes much easier, since you no longer have to smuggle US paper bills into Brazil. Similarly, step #2 becomes a lot easier, because a Brazilian person can acquire Bitcoins in Brazil and then immediately buy a vast array of products with it, since they can use the Bitcoin online in US stores, since they no longer are limited to physical bills that only work on the ground in Brazilian stores.
big al
Feb 14 2017 at 9:49am
the use of blockchain for real estate title is very interesting. i imagine it linked to some form of Google Maps where the actual property boundaries are also clearly defined on a satellite photo.
jw
Feb 14 2017 at 3:15pm
Both depressed and excited by this episode. Notes:
– Depressed because of the billions of people in this world that live under failed economic models where they are forced to invent mechanisms to circumvent that economy.
– Excited because in almost any country where these models exist, human ingenuity still succeeds in successfully overcoming these hurdles. Whether it is via black markets (simply inefficient capitalism) or via alternative monetary methods from bartering to Bitcoin.
– The US is not exempt. You can’t use EBT cards for alcohol or drugs, so there is an inner city currency market for EBT cards with informal market exchange rates. There is also a push from some economists (Summers, Rogoff, Piketty, others) to eliminate high value US currency under the pretense of inhibiting crime. (Keep in mind that every year the US prints more $100 bills than $1 bills.) They rather transparently actually want to track and record all of your transactions. Bitcoin would help to circumvent this.
– Granted, both Bitcoin and the dollar are fiat currencies, but Bitcoin has two unmentioned advantages. It has a fixed limit (21 million Bitcoins), so a person or country cannot simply expand the number of Bitcoins infinitely; and they are increasingly difficult to mine as the number of remaining Bitcoins gets smaller, so a country cannot merely hit the “Print” button and again expand the money supply infinitely.
– That being said, I don’t have a lot of faith in fiat currencies (including the dollar). However, the alternatives do not scale. With a limit of 21M at the current $1,000 price, that is $21B of potential currency ($16.2B of actual currency since 16.2M bitcoins have been mined so far). You can’t finance even a small fraction of all of the third world countries’ economies on that little currency.
– Of course, Bitcoin advocates will claim that it is merely underpriced and the price will grow with its use. But the same argument applies to gold. The US stockpile is worth about $320B (although that sounds like a lot the Fed’s monetary base is $4T, with $1T in actual circulating bills). So gold could just as easily be touted as underpriced and just needed to rise in price to back the dollar (at M1 or M2 or M3 or other would be an interesting debate). Bitcoin would still have a major advantage in transaction costs and anonymity (although there are already gold based blockchain services and exchanges – the Royal Mint being one).
– The anonymity of Bitcoin also helps to hide theft and fraud. The Mt Gox virtual bank robbery resulted in the hackers getting away with hundreds of millions in untraceable Bitcoin. While Bitcoin helps to solve the peer to peer trust problem, trust is still required in the exchanges.
– Another reason that I am not a Bitcoin fan is because I have a sneaking suspicion that somewhere in the world Satoshi (the unknown originator of Bitcoin) is on a beach after mining hundreds of millions of dollars of the first Bitcoin (when they were much, much simpler to mine). This seems a little Ponzi-esque to me.
– I agree that the potential for the blockchain to revolutionize property rights is there, but needs a user interface that your grandmother can understand before it becomes successful. (I loved the DeSoto reference and discussion- people in the US do not understand how poor property rights are in some countries). T0.com (here) is using the blockchain to do the same for financial transactions and securities titling.
Doug Coate
Feb 14 2017 at 3:55pm
This is from memory from one of the previous Econtalk episodes. Every 10 minutes the location of every bitcoin is established. This is accomplished when a critical mass of miners agree on where every bitcoin is. If you are one of the critical mass that reaches agreement, you get a bitcoin reward. If you discover where every bitcoin is a millisecond after the critical mass has reached agreement, you lose. There is a race to use computing power to be one of the winners. Is this the only way that the supply of coins is increased?
Blythe Masters, who helped give us credit default swaps (a compliment), is trying to use block chain to keep track of securities ownership.
Someone please correct all of the above. It should’ve been more clear in the podcast what happens every 10 minutes and how the supply of bitcoins is increased.
Schepp
Feb 14 2017 at 9:43pm
Maybe a very different take. Using silly free electricity doesn’t seem to me the path to prosperity. The government in Venezuela is terrible. I have no doubt, but working to avoid all taxes does not make a workable society either.
Anonymity seems on a supply and demand function. It is solely expensive to know who is paying whoever. I am not proposing any real solution, but down playing bitcoin.
Lauren
Feb 15 2017 at 9:39am
Doug Coate wrote:
The episode you are remembering is probably Wences Casares on Bitcoin and Xapo, minute marks 7:10~18:41, which delved a bit into some technical considerations. You have given a very good summary.
Yes. This is the only way to increase the supply of bitcoins. Participating in the anonymous bitcoin mining process and being either the winner or part of a winning competing coalition is the only way to increase the supply of bitcoins. No individual–including not even a government leader or central banker, nor any act or actor on behalf of a congress, parliament, or treasury–can increase the supply of bitcoin except by becoming one of the bitcoin miners.
At least, that’s the only way short of fraud–including large-scale collusion with an aim to control 51% or more of the entire worldwide galaxy of bitcoin-mining computers and computer power. Difficult, but not impossible in a world where the number of bitcoin miners goes up and down. An entity that controlled 51% or more of the mining could in theory speed up the bitcoin supply, as well as acquiring ownership to the newly produced coins, or in an extreme case of fraud, sanction false changes to the blockchain. Unlikely that could persist for long.
No one can add a single new bitcoin to the total supply except by joining the anonymous game to compete–that is, by becoming a miner–to win the creation of a new bitcoin. The supply cannot increase otherwise. Unless perhaps you are the original Satoshi Nakamoto or have his original key, in which case I suppose I wouldn’t want to rule out the possibility that you can add some new bitcoins to the supply–but possibly at the expense, at this point, of outing yourself to the many miners who are watching the blockchain every second.
Jeff
Feb 15 2017 at 10:19am
It’s always very cool to see innovations that we hear first on Econtalk come to widespread use!
However, I thought Russ’s discussion of “how bad is it really though?” inadvertently downplayed the suffering there and around the world. For instance, Russ went to UChicago so he knows that I could characterize Chicago as having fantastic universities, offering world-class arts performances and serving as one of the world’s business capitals. But isn’t it equally true for me to characterize the city as a place where violence and evictions occur more frequently than most elsewhere in the country?
When Russ characterizes a country as “incredibly safe” and “nothing like a war zone” I don’t doubt that’s how he feels when visiting there. However, he implied that’s the sole truth. While most EconTalk listeners who visit there will probably feel like Russ, isn’t he overlooking the pain felt by displaced people who are unsure of their society’s future?
A place can be violent and safe, poor and wealthy. It depends on the viewpoint. Maybe that was Russ’s point, but I thought he was suggesting an either/or proposition.
I think it’s this kind of singular narrative lens that led economists & the wider public to overlook the “short-term” suffering of those on the “wrong” side of globalization. Russ and EconTalk have done a phenomenal job educating me on that issue, but I’d encourage him to think about where else the “single narrative” falls flat! Thanks!
Daniel Ko
Feb 15 2017 at 12:05pm
Very interesting episode.
I’m currently writing a master thesis on the economics of bitcoin. I’m especially interested in how competition between it and traditional currencies would look like, in a scenario where bitcoin constitutes a significant fraction of currency used.
Russ, or anyone else for that matter, are you aware if there are any fitting formal models of currency competition? To be more precise, there are, of course, general equilibrium macro-models with, say, two-country economies where the exchange rate is determined simultaneously with all other prices. But it seems to be very different, because there each currency is used only for their respective goods market and needs to be exchanged for imports/exports. Bitcoin is different in that it’s currency competition within the same goods market. Is this even properly formalizable?
This is especially tricky given what Mr. Epstein said about the Bitcoin-credit cards, and other entrepreneurial solutions. If people use bitcoin credit cards for their purchases, but in the background each purchase is based on conversions into dollars, what are the real effects on the dollar-bitcoin exchange rate, as this form of transaction increases? To what extend does it matter if on receipts or internally everything is “priced” in dollars or bitcoin, respectively, if they are constantly traded for another to facilite transactions? How does the bitcoin-economy influence the price of the dollar against bitcoin or other goods, or the other way around?
It’s all a huge mess and I don’t think there is a very clear understanding yet. By the way the same, to some extend, applies to traditional “competing currencies” as invisioned by Hayek. It seems to me the root of this is that most economists are focused on a binary state of affairs. Either currency A is accepted, or B, in any specific location. That’s logical, because clearly there are huge network effects in currency usage, and we’d expect it to be a natural monopoly. But it also means that competition, transition, etc. are understudied and not understood well enough.
Shayne Cook
Feb 16 2017 at 5:52am
To Daniel Ko:
I would suggest you evaluate the Bitcoin phenomena from the perspective of it being a commodity, rather than it being strictly a currency, for your thesis.
Kevin Ryan
Feb 16 2017 at 8:41am
As ever Bitcoin produces an interesting talk with a range of points (including different players and uses of Bitcoin) and also a range of views in the comments.
Like many others I am still struggling to feel I properly understand the implications of the package of features that comprises Bitcoin. (Identifying the Magic v solid advances v features reproducible in existing currencies v puff).
But I would currently tend to agree with Shayne Cook’s comment that Bitcoin might be better examined from the perspective of it being a commodity rather than a currency.
And also with Schepp when he/she says “Using silly free electricity doesn’t seem to me the path to prosperity. The government in Venezeula is terrible. I have no doubt, but working to avoid all taxes does not make a workable society either.”
A few points of my own:-
Venezuelan miners – I find it hard to believe that a middle class lifestyle can be maintained by earning 70 to 80 dollars a month and spending this by shipping food from Miami. Which is what is suggested by JE. Is something missing here?
Facilitation of Brazilian smuggling/tax evasion – Looks like the type of predictable activity that causes authorities to have a natural inclination to oppose Bitcoin and similar schemes. Whether they have the will/capability to resist is another matter.
Value of Bitcoins – Like many others I fear both that this is a type of Ponzi scheme that will make us look foolish when it inevitably collapses (Blockchain good but Bitcoin bad), and also that I have lost/will lose a fortune by not investing in it!
My bias is towards the former; and I wonder about the importance of the fixed number of Bitcoins in supporting the value and how sustainable this is;
e.g. is it really credible/sensible to think that the supply of Bitcoins will remain unchanged as/if the demand for them for transactions increases, and that this will therefore support the virtuous circle of a rising price and increasing appetite to hold/transact in Bitcoin?
also, doesn’t a combination of increasing transactions (raising the total cost of mining/the blockchain – if I have understood it correctly) and a reducing number of unissued Bitcoins undermine the economics of mining – unless the price keeps rising?
jw
Feb 16 2017 at 9:59am
Kevin Ryan,
– I am not sure that I agree with the currency/commodity distinction. Both gold and silver have commodity uses but are mostly used as currency (or at least as a store of wealth).
– With regards to your last point, one of the underlying features of Bitcoin is that mining gets increasingly more difficult over time. A bunch of laptops won’t work anymore. Miners typical use very powerful workstations with custom computer chips designed just to mine Bitcoins (kind of like graphics cards for games, but just for mining).
So they are betting that the price will rise, but that is a risk, not a guarantee. There are a number of other blockchain based currencies competing with Bitcoin, but they have not achieved the critical mass of acceptance that Bitcoin has. (And I suspect that one of the driving motivations behind inventing new blockchain currencies is that as the inventor, you get to mine a lot of the easy, early coinage…)
Kevin
Feb 17 2017 at 11:03am
Every bitcoin episode I plan to buy some bitcoins, but never do. I could have purchased 100s when I first listened to EconTalk, now I can get 3 for the amount I want to invest.
Bitcoin has no limit to the amount of money it could represent – gold does. I cannot infinitely split gold as it is a physical medium. If we used gold for all the worlds transactions the units of gold would be less than micrograms and very hard to keep track of.
If bitcoins became the worlds currency you can split it infinitely. Maybe a future current dollar is worth a pico-bitcoin, but it does not matter because for transactions in digital space its all the same. Gold cannot do this.
Interesting that in sci-fi the future always has “credits” but I don’t think anyone predicted a crypto currency, a truly amazing and brilliant development.
jw
Feb 18 2017 at 10:46am
Kevin,
This problem was solved a few years ago by Bitgold, later acquired by Goldmoney (here).
The issue of trust in the exchange remains, but it seems to be working well. Currently, it is about 1/10th the size of the Bitcoin market.
Craig Stevens
Feb 19 2017 at 4:38pm
Hi Russ,
A very interesting show about Bitcoin. There was one important issue that you didn’t address with your guest, that I’m curious about. One of the functions of a government is to establish a currency and to manage aspects of the currency to further the interests of the country (at least in theory). As an example, Great Britain chose originally to become part of Europe, but not to give up the Pound, as they wanted to be able to control their own financial fate. So, if Bitcoin gains in popularity in Venezuela (or anywhere else) to the extent that it is used for a substantial proportion of transactions, does that country lose its power to control its own financial fate, or at least does it have a reduced ability to do so? If so, what are the implications of having a world-wide currency not controlled by any government on the notion of statehood?
Bogwood
Feb 19 2017 at 8:29pm
It is obvious, but maybe not clearly stated that electricity is expensive in Venezuela, but the price is low, similar to natural gas in the USA. So there are community costs as others have noted, it could have been grow lights.
If bitcoin is limited, why not just ten or even one, the formula “needs “a certain number or are the rest more for marketing? There is no real reason to mine another ounce of gold, or maybe another bitcoin. Both are high tech waste of energy.
Using bitcoin to transfer assets is questionable, but it cannot be used to move the person and the person needs to stay unless someone else wants to move to Venezuela. It is a zero sum world.
gj
Feb 22 2017 at 2:50pm
Bogwood,
I believe the reason that the supply gradually grows over time is to keep transaction fees low for the immediate future, thereby speeding the rate of adoption and growing the user base. Eventually (sometime in 2140 most likely), the supply growth will halt, meaning that miners will need to be compensated through transaction fees, paid for by users (as opposed to ‘block rewards’: coins created out of thin air as a reward for creating a new block).
taxpayer
Feb 23 2017 at 2:40pm
“Sam Bass Warner once said that the most important thing that a government does is keep track of who owns what land.”
That seems obvious and I’m glad it was said by a major-league historian. But where did he say it? Can someone provide a reference?
Dave Rebol
Feb 23 2017 at 3:44pm
Mr. Roberts,
Why do you soft sell the economic policies that have caused the failure of the Venezuelan society? They are essentially just the maturity of what Bernie Sanders is advocating. To say “partly on government mistakes” or on falling oil prices is absurd. The collapse of the medical system, food shortages, etc were clearly the very predictable result of government policy. Price controls, nationalization of industries always lead to shortages and eventually oppression. The only variable is the time frame. “We always run out of other peoples money”
Bogwood
Feb 23 2017 at 6:18pm
Caitlin Long has an interview on Financial Sense which adds perspective(paywall and she is motivated as CEO of a blockchain company). The extra clarity may be just hearing it for the third time. She has a free blog. The emphasis is that two older ideas, distributed bookkeeping and instant transactions could reduce the banks monopoly rents(in the trillions per year).
It is still not clear how it fits the larger ecology system, and is not a hazard/waste from the real world perspective. Mother Nature probably doesn’t care about either more gold mining or more bitcoins. Seems like Duck Tape, not that there is anything wrong with that.
Ligia
Feb 28 2017 at 9:33pm
I looked up the cost of electricity to run a desktop (average data collected from the Internet): Power (400 Watts) * no of hours in a month (730) * average electricity cost (.25c) = 73$. So, in market price conditions the revenue from mining bitcoins is approximately equal to the costs incurred runing the operation.
And what about the internet connection? There must be a fee for that too, probably market rate or even higher.
But this is only the actually incurred cost. I think the main factor for which mining bitcoins in Venezuela is appealing is the low opportunity cost, given that 70-80$ per month puts somebody in the middle class of that society.
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