Thursday, April 25, 2013 117 Comments

Bitcoin panic light flashing bright amber

The once confident Jon Matonis has changed his tune a little:
More than a decade ago, regulators nearly suffocated PayPal. Now it looks like they’re trying to squelch another disruptive, innovative payments system.

At least three exchanges in the U.S. that traded the digital currency Bitcoin have shut down, apparently as a result of guidance issued last month by the Financial Crimes Enforcement Network. That agency has emerged as the top threat, at least in in the United States, to the decentralized Bitcoin network – more so than the widely reported price volatility and hacker attacks.
Matonis does not include the most telling parts of the Bradley Jensen interview (my transcript).  Around 17:30:

Jensen: "I have heard through the grapevine that FinCEN has prosecutions in the works for Bitcoin broadly speaking. My guess, based on the timing of the guidance, and what I had heard previously from the rumor mill about the prosecutions, is that FinCEN put out the guidance sort of ex post facto to justify the prosecutions that they're about to launch."

Interviewer: "So you expect this to happen within in the next couple of months..."

Jensen: "Again, I've heard different rumors, it's difficult to predict, but yeah. We knew that the prosecutions were in the works, and then later the guidance came out, it seems like a sort of CYA approach to how they're doing it."
Around 21:30:
Jensen: "We knew that these guidelines and these prosecutions were in the works, even last Congress. Ron Paul was the chairman of the House subcommittee that had jurisdiction over FinCEN, and he never had a single hearing on this. Congress has dropped the ball."

Interviewer: "Why is that, do you think?"

Jensen: "For a lot of people these are relatively obscure questions... I mean, Congress is a representative body that works to meet the demands of their constituents. Their constituents are demanding a balanced budget or gun control or immigration reform or something else... those are the issues that you deal with."
Jensen, like Foseti, has lived in and knows tha USG - the real one, not the one you see on TV:
What is the purpose of an alternative currency?

Let me answer that by analogy. What is the purpose of the internet?

If you’re reading this, you use the internet to read the often unorganized thoughts of a person with strange views on all kinds of subjects. Undoubtedly, facilitating such reading is one function of the internet. In reality, however, the internet is just a way for people to watch porn.

Similarly, an alternative currency might be a cool way to create a better store-of-value – one that’s free from manipulation of central bankers and large banks. In reality, however, it’s just a way for people to break laws governing financial transactions.
It's kind of a problem that (most of) Silicon Valley thinks it's governed by the TV Washington.  SV is a very confident place.  Very confident people have a way of thinking a new reality into existence.  Reality itself changes to conform to their confidence.  Sometimes this actually works.  Other times...

Monday, April 8, 2013

Bitcoin is money, Bitcoin is a bubble

[I promise - this is my last Bitcoin post.  I fear it attracts low-quality traffic.  Comments are off.]

Someone in a meeting the other day called my theory of why Bitcoin, a useless commodity, has a nonzero price, the "bubble theory of money."  I like it.  I think it could stick.

When I first came up with this BTM (which is only a slight, slight variation of Carl Menger's theory) and posted it seven years ago, I was genuinely concerned that the global mass mind, or at least the global financial mind, might be hyper-rational and converge spontaneously on the equilibrium solution, perhaps in as little as fifteen minutes.  Resulting in unbelievable global mayhem.  Which would arguably be my fault.  And for which I would certainly be blamed.

Obviously, I had a lot to learn about the global financial mind.  No one in this business has a clue.  Everyone who thinks he has a clue has no clue at all.  The rest get by with about half of one, plus a dab of good taste and a lot of hard work.  If you have money to stash away and enough to hire a pro, find some grizzled old silverback like Cassandra and let his spidey sense do the work.  He doesn't have a clue, but nor do you.

For example, while the BTM is impeccable in theory, it does not tell you, me, or anyone whether Bitcoin is money or Bitcoin is a bubble.  If Bitcoin is money, Bitcoin at $150 is absurdly cheap.  Otherwise, it is hilariously expensive.  Bitcoin will go to zero or infinity - almost certainly the former.  What is the expected value?  Answer unclear - ask again later.

Us feeble-brained humans are uncomfortable with path-dependent outcomes.  We don't want Bitcoin, or anything, to have an arbitrary price determined merely by marginal bid and ask, let alone a multiple equilibrium - we want it to have an underlying value.  Which is a physical property, like weight or orangeness.  When I say that Bitcoin is money and Bitcoin is a bubble, your mind grows nervous, as if forced to contemplate a car that is orange and green.  Sure, it's all waves and particles at the bottom - but, really.  Physics is one thing, accounting is another.

The BTM asserts that money and a bubble are the same thing.  Both are anomalously overvalued assets.  Both obtain their anomalous value from the fact that many people have bought the asset, without any intention to use it, but only to exchange it for some other asset at a later date.  The two can be distinguished only in hindsight.  If it popped, it was a bubble.  If not, money - so far.

In any realistic economy, real or virtual, there is a demand for at least one good which is used as a "store of value," that is, not used or intended to be used by the owner, but owned simply to transfer purchasing power across time.  Nonetheless, the owner holds this good and participates in the market for it.  If many owners standardize on the same good, they affect the market for this good.  We can think of their collective purchasing power as a sort of "energy" that flows into this market.

It turns out that the correct collective strategy in this game is for everyone to standardize on the same asset as a store of value, and for this asset to be one of intrinsically limited quantity.  If the quantity is not limited, as for example in a manufactured good, a stable pool of savers will not increase its price.  If the quantity is limited, as with gold, Bitcoin, etc, the price will increase as savings energy flows in - and, of course, decrease as it flows back out.

There is no way to eradicate this effect from anything like a realistic economy.  There is always at least one bubble.  Ideally, this bubble is stable, and we call it "money."  If you try to spread savings energy across all the goods in the economy, it will stay in storable goods and not in un-storable ones.  It will flee from manufactured goods and end up in rare collectibles.  Finally, it will flee from a broad spectrum of collectible assets and end up in a single standard.  Those who are late in fleeing are, by definition, caught in a bubble which pops - and taste the pain.

You might imagine that investment transactions would neutralize or at least reduce the demand for money.  Not so.  True, instead of holding cash, you can hold a debt - a promise of cash delivered next year.  Your demand for cash, and your impact on the price of cash, is now zero.  However, the economy's demand to save cash is unchanged.  In exchange for that debt, you gave someone else a bunch of cash.  She is now the saver.

Bitcoin is an exceptionally pure test of the BTM, because it has no intrinsic utility.  It is uncomfortably reminiscent of that apex specimen of the South Sea Bubble, "a company for carrying out an undertaking of great advantage, but nobody to know what it is."  One of the problems with the South Sea Bubble - in fact, one of the reasons why South Sea Company stock could not become a new monetary standard - was the inability to define a reason why one security should be the standard, and not another.  There are Bitcoin clones, all more or less worthless.  Bitcoin is a protocol standard, and everyone in our era knows how protocol standards play: winner takes all.

When we define the essential characteristic of "moneyness" as overvaluation, not as currency, we see that commerce in Bitcoin has no direct relevance at all to its price.  If you are spending in Bitcoin, you are not holding it.  All that affects the BTC/USD exchange rate is the order book of the people who hold BTC and are willing to sell it for USD, and vice versa.

Indeed, it is logically possible to imagine an economy in which the medium of saving and the medium of exchange are different assets, and the medium of saving is overvalued but the medium of exchange is not.  This actually happens in seriously mismanaged Third World countries, in which all savings flees to gold or hard currency, and the soft currency is held only for immediate commerce.  Often with an inflation rate of double digits per month.

History has never seen a pure monetary standard like Bitcoin.  It's not only that gold has intrinsic material utility - even fiat currency, though tremendously overvalued by savings energy, has intrinsic value.  Try paying your taxes without it.  Dollars will not become worthless even if Bitcoin becomes the global monetary standard, because dollar-denominated liabilities will remain.  However, considering the price of Bitcoins in this outcome, these debts will become macroeconomically quite easy to pay - an unqualified boon in my opinion.

The dollar is already the global monetary standard - what creates any incentive to switch to Bitcoin?  If the dollar was financially perfect, there would be no such incentive.  The dollar is anything but financially perfect.

Probably the easiest way to see this is to consolidate dollars, Treasury notes, and in fact all securities explicitly or implicitly supported by the US Government - a strong argument could be made that this set now includes both the stock market and the real-estate market - as USG liabilities.  To put it crudely, a dollar is a share of stock in America.  Like a frequent-flier mile (which is also a liability), it confers no explicit rights, but can be redeemed for valuable privileges (especially on April 15).

This set of liabilities is constantly expanding - quite a bit more rapidly than the Bitcoin pool.  In plain English, USG leaks money.  It bleeds, in fact, like a stuck pig.  When we do accounting in a diluting equity like this, the rational way to track our positions is not by the number of shares, but by the percentage of ownership.  If we adopt this "normalized accounting," we see that normalized money is constantly being sucked out of our bank accounts.

Fortunately for those who live in America, normalized accounting also shows us that consumer prices in America are constantly dropping.  Price deflation is the rule.  Consumer price indexes show negligible price changes in non-normalized accounting, not only because they are fudged and rigged, but because prices are set by dollars competing for goods.  Because American spenders have fewer and fewer normalized dollars to spend every year, normalized consumer prices are also dropping.

But the quantity of these normalized dollars is constant, so they have to go somewhere.  Where do they go?  To Asia and to rich people, generally.  If we look at the prices, normalized or not, of the assets that Asians and rich people buy, we see these prices going up.  Rather rapidly.  So, for these people (who hold quite a few dollars), the dollar is a rather poor store of value.

Because it seems unimaginable that USG will repair its hemorrhaging finances, the opportunity exists for a sounder monetary standard to outcompete its notes.  However, it is only an opportunity.

USG, now and for the near-term foreseeable future, can kill Bitcoin dead as a stone by rendering it ineffective as a store of value, simply by using its gargantuan physical force to prohibit exchange of Bitcoin for dollars.  Even a credible threat to shut down the exchanges will result in an enormous demand to flee from Bitcoin, effectively popping the bubble.  If the exchanges are really and truly killed, there will be a billion dollars of Bitcoin market capitalization that has no practical way to escape.  The holders of this Bitcoin will write it off as worthless - like South Sea or Mississippi Company stock.

The best thing about this outcome, from USG's perspective, is that to those who lost money in the Bitcoin bubble, it will seem like their own fault for being such fools.  True, as a result of USG actions, their personal net worth might drop vertiginously in an afternoon.  But it's not that the evil government confiscated their Bitcoins - rather, that the market betrayed them.  As with any bubble that pops.  So, just as 300 years ago, no political resistance can save the bubble.

On the other hand, suppose Bitcoin is money?  At this point, I can guarantee it.  Either USG will kill Bitcoin, which it can and probably will, or Bitcoin will be the new monetary standard.  In this case, Rick Falkvinge's projections are quite conservative.  Simply dividing dollar supply, however defined, by Bitcoin quantity, is an extremely incorrect way to project the USD/BTC exchange rate.  On the other hand, there is no better way.

In a world in which the entire pool of savings energy has moved to Bitcoin, what is a dollar worth?  On the one hand, enormous dollar debts exist.  On the other hand, those debts themselves must be valued as securities in Bitcoin.  As the BTC price increases into the millions, the purchasing power to pay off all the dollar debts - simply by cashing in a few Bitcoins - appears with it.  There are no significant Bitcoin debts, and nor will there be any until the transition has completed.

This is a scenario in which no one wants to hold either dollars, or dollar-denominated debts, because the purchasing power of these assets in Bitcoin is constantly decreasing.  (Note that it is already decreasing - at quite a rapid clip.)  The dollar is now the bubble, and devil take the hindmost.  The savings pool evacuates this bubble, but it does not evacuate evenly or all at once.  Rather, those who get out first (like Rick Falkvinge!) become much wealthier than they were before.  Those who get out last, however, can see a fortune shrink to a pittance.  This is classic hyperinflation.  A currency never hyperinflates by itself - it always hyperinflates relative to some other medium of saving.  There is always a savings pool, and always an overvalued asset.

Tangible assets - stocks and real estate - do better.  Across a monetary transition, a house remains a house.  You can still live in it.  On the other hand, the price of a house or a stock, relative to cash, is determined by interest rates.  Before the reboot, it is determined by USD interest rates.  After the reboot, it is determined by Bitcoin interest rates - which are effectively infinite during the transition, and relatively high even when the savings pool stabilizes.

Why relatively high?  Because they reflect the actual collective time preference of savers and borrowers, rather than the political incentives of Professor Bernanke.  We have no way of knowing what interest rates in a free market would look like - all we know is that ours are way too low, resulting in extreme malinvestment and way way way too much debt.

But the most significant effects of this unlikely, but awesome, transition are politicalRick Falkvinge, who to be frank could be easily mistaken for a goddamn hippie, has only begun to imagine them.  Yes, a world in which governments were subject to ordinary accounting reality, and could not fund themselves by expanding their balance sheets, would be a very different one.

But even more important - money is power.  Today, power remains in the hands of the great fortunes of the early 20th and even 19th centuries - the Carnegies, Rockefellers and Fords, not to mention the many lesser billionaires gathered under their umbrella.  The greatest of these fortunes have of course passed out of individual hands and into those of foundation managers.  As with Obi-Wan, this has not lessened their power at all.

When instead of being determined by whose ancestors cornered oil in 1896, the distribution of great fortunes is determined by who bought Bitcoin when 10K BTC would buy a pizza - really, a no less arbitrary function - we see the balance of wealth, and hence the balance of power, in the hands of very different kinds of people.  What changes this would bring - no one can know.  Probably none, as it will never happen.

Disclosure: I have no Bitcoin.  Which is not because I disdain the great bet - but just because I'm a poor student of history.  But if you have some and think you've learned from UR, I just made a wallet: 12jmAcfRptnP7wkvepXQoYUt5yDsYxHRiZ.  Send me a little and I'll buy my wife a pizza.  Send me a lot and I'll found the resistance.  A luta continua!

Wednesday, April 3, 2013 90 Comments

Felix Salmon's Bitcoin FUD

Felix Salmon has a very good job.  He gets paid - and paid well - to pretend to think.  He's very good at it.  You have to respect anyone who's good at his job.

But if by some misfortune you are actually capable of thinking for yourself and, worse, enjoy it, you cannot have Felix's job or any job like it.  Not only is Felix not paid to think, he is not allowed to think.  Thinking is above his pay grade, as they say in the military.  A private who thinks he's Napoleon is not only not Napoleon, but not a very good private.

Rather, Felix's job (as with all legitimate journalists or columnists - though the former are not even allowed to pretend to think, which must really sting) is to communicate the thoughts of his sources, rewording them as if they were his own thoughts.  His sources are legitimate thinkers - professors, policymakers, and priests.  Just kidding.  Obviously there are no priests. 

Nonetheless, his sources (no sources, no journalist) have obtained distinguished titles at important institutions, which is (a) very difficult and (b) something Felix probably once tried to do, but couldn't.  If he disagreed with these distinguished sources, humbly and respectfully offering his own contrary opinion, they would look very puzzled, as though their golden retriever had attempted to engage them in a debate about Thomas Aquinas instead of fetching the goddamn ball.  Then, they would find a new dog.  An excellent fido is our Felix - but the planet has no shortage of dogs.

It is fundamentally erroneous for an Internet crank like me to argue with one of these microphones.  You might as well argue with a dog, or a lamppost, or anything else that can't change its mind.  My beef is with the sources, or rather, the institutions.  Or rather, the institution

(There is really no one these days who gets paid to think.  The difference between Felix and his sources is only that Felix knows he is not really thinking, whereas his sources actually believe they are.  Nonetheless, they would not have obtained their important positions had they thought differently.  And might even lose them, or at least sink a little, if they changed their minds.  Our Cathedral is made of real stones and real mortar and is quite invulnerable to mere windy thought.)

Nonetheless, Felix is an excellent fido and has a knack for catchy summarization.  It's not as easy as it looks.  His Gladwellian airport-bestseller product is full of transparent FUD, like "OMG haxx0rs!", to which a response would demean us both.  Pretending to think is one thing.  Blatant padding, another. But there are a couple of vaguely substantive anti-Bitcoin points which deserve an equally snappy response from someone with, if I may be so modest, a clue.

The first is the "argument from instability":
This is actually a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next?
First, every currency is a "vehicle for financial speculation."  When you exchange good X for currency A on Tuesday, you are speculating that you will be able to exchange your A for good Y on Thursday.  This is a guess about the future, ie, "speculation."  Moreover, by choosing to use A as an intermediary rather than B, you are speculating that the exchange rate A/B will not change in B's favor between Tuesday and Thursday.  Otherwise you would have chosen B.

(It's typical of our thoughtfree age that a successful financial columnist feels no qualms about using the word "speculation" as a pejorative.  Can anti-Semitic rabbis be far behind?)

Second, Felix's sources will tell him that a currency has two roles: storing purchasing power and solving the coincidence-of-wants problem.  This is because Felix's sources are thinking thoughts last actually thought in the 1930s, ie, before computers.  With these magical devices, coincidence of wants is not in principle a problem, though small frictional effects persist.

It is trivial to do business in Bitcoin when BTC/USD is unstable.  Simply post the price in USD, and use the BTC/USD exchange rate as of the transaction date.  Even if buyer and seller are both saving in USD, within a couple of seconds they can exchange in, send Bitcoin, and exchange out.  The prices realized may differ slightly from the posted estimate, but only slightly.

In the 21st century, a currency has only one role: storing purchasing power.  Or to be more exact, containing the inevitable overvaluation of at least one asset in an economy where many actors want to store purchasing power.  If you can use this store of value directly in transactions, nice.  Nonetheless, rational actors will "speculate" on their optimal store of value, and convert on the fly if needed.  Using, you know, computers.

It falls under "padding," but I can't resist this moment in which our Felix truly plays his shill card:
The overwhelming majority of dollars in the world are deposited safely and electronically in banks: there’s something weird and self-defeating about the kind of people who keep their savings stuffed under the mattress. In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.

Oddly, I actually lived in Cyprus when I was a kid.  It's a dangerous practice for a fido to keep his boilerplate stuffed under the mattress.  He's paid well by the word - the product should be fresh. 

It's also dangerous to channel Bulgakov, whom Felix probably hasn't heard of but can Google:
'In Sawa Potapovich's masterly interpretation we have just heard the story of "The Covetous Knight."  That knight saw himself as a Casanova; but as you saw, nothing came of his efforts, no nymphs threw themselves at him, the muses refused him their tribute, he built no palaces and instead he finished miserably after an attack on his hoard of money and jewels.  I warn you that something of the kind will happen to you, if not worse, unless you hand over your foreign currency!'
It may have been Pushkin's verse or it may have been the compere's prosaic remarks which had such an effect; at all events a timid voice was heard from the audience:
'I'll hand over my currency.'
'Please come up on stage,' was the compere's welcoming response as he peered into the dark auditorium. 
A short blond man, three weeks unshaven, appeared on stage.
'What is your name, please? ' enquired the compere.
'Nikolai Kanavkin ' was the shy answer.
'Ah! Delighted, citizen Kanavkin. Well? '
'I'll hand it over.'
'How much? '
'A thousand dollars and twenty gold ten-rouble pieces.'
'Bravo! Is that all you have? [...] Where are they hidden?'
'At my aunt's, in Prechistenka.'
'And where have you put them?'
'In a box in the cellar.'
The actor clasped his hands.
'Oh, no!  Really!' he cried angrily.  'It's so damp there -- they'll grow moldy!  People like that aren't to be trusted with money!  What child-like innocence.  What will they do next?
Kanavkin, realizing that he was doubly at fault, hung his curly head.
'Money,' the actor went on, 'should be kept in the State Bank, in dry and specially guarded strongrooms, but never in your aunt's cellar, where apart from anything else, the rats may get at it.  Really, Kanavkin, you should be ashamed: you -- a grown man!'
Kanavkin did not know which way to look and could only twist the hem of his jacket with his finger.
'All right,' the artist relented slightly, 'since you have owned up we'll be lenient...' Suddenly he added unexpectedly: 'By the way... we might as well kill two birds with one stone and not waste a car journey... I expect your aunt has some of her own hidden away, hasn't she?'
Okay, that's cheap.  But it is simply lovely how much our fido loves his loving master:
Because it turns out that financial-services companies are a very important part of any democracy.

It’s because we place so much trust in banks, after all, that they are forced to take on a great deal of responsibility. Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions. The population of the entire country, as represented by the government, stands behind bank deposits and promises to honor them even if the bank goes bust. Money, in other words, is a key ingredient in the glue which keeps the social compact together. (What we’re seeing in Cyprus is in large part a demonstration of what happens when that compact starts becoming unglued.)

Bitcoin, in that sense, is anti-democratic...
Dare I suggest that Fido understands 21st-century democracy perfectly?  "The population of the entire country, as represented by the government."  And hence, transitively, by J.P. Morgan.  I would love to have made it up.  Crap, Orwell would love to have made it up.

But there is substance here, or pseudo-substance anyway.  The cornerstone of the attack on the kulaks and Kanavkins:
Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities. And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.

The result is an economy which would simply grind to a halt, with massive unemployment and almost no economic activity. In a word, it would be a Depression. In order to have economic growth, you need monetary growth as well — and that’s something which is impossible to achieve in a bitcoin-based system. Currencies such as the dollar, with a central bank which can print money at will, have succeeded for a reason. As economies grow, the money supply has to be able to grow with them. And that’s why bitcoin can never really succeed over the long term.
"In order to have economic growth, you need monetary growth as well."  But standing in its way - the Covetous Knight again!  A Trotskyist, a hoarder and a wrecker!

Surprisingly, this is perfectly true.  Actually, the key to understanding this argument is to understand that everything in it is true - if you look at it from the right perspective.  Or at least, the fido's perspective.


In order to have economic growth, you need monetary growth as well.  Why?  Because "economic growth" means "increase in the number of monetary units spent by consumers."  In order to increase the number of dollars that consumers spend, consumers need to have more dollars.  But is this "real" growth, ie, more and better products, or "nominal" growth, ie, just "inflation?"  Our hedonics experts will be looking closely at the quality of the products to ascertain this.


At this point, a person actually addicted to the vice of thought might ask: in an economy with a fixed number of dollars, is it possible to have constant dollar spending, for more and better products?  Ie, in fido language, zero "nominal" growth, but positive "real" growth?  What an odd idea.

But again, Fido turns out to be perfectly right.  It is not possible to fix the quantity of dollars in our economy, because the quantity of dollars sensu stricto (that is, liabilities of the Federal Reserve) is vastly disproportionate to the quantity of debt (market capitalization of the financial system).  By well over an order of magnitude.

Imagine a Bitcoin economy in which there were only 20 million Bitcoins, but 200 million promises to deliver future Bitcoins.  It is easy to see that this debt could not possibly be valued at par.  If we started with it valued at par, we would see the effective dilution of the Bitcoin market by a flood of effectively bogus promises.  But the market, being a market, would rapidly unravel this scam and devalue the bogus promises - increasing the exchange rate of a real BTC over a bogus promise, and also increasing the exchange rate of a real BTC against all other goods.

At a macroeconomic level, this would constitute a gigantic depression, exactly as Felix describes.  The fault would be not on the hands of those who exposed and detonated the debt bomb, but those who built and maintained it.  In the dollar debt bomb, continuous monetary expansion is needed to keep the plutonium core stable, which is why Good Professor Ben is lending us $85 billion a month.  With this mega-stimulus, spending scrapes along the bottom in a stagnant desultory way.  Without it, the core begins to contract, accelerates and then implodes - just as Irving Fisher (who originally thought this thought) explained.

Fortunately, there is no significant debt in Bitcoin.  In fact, BTC appreciation is a therapy for the dollar's debt bomb - because as the "bubble" expands, dollar purchasing power is created out of nowhere.  If BTC has the unlikely luck to run to fixation and become the world's standard currency, San Francisco will be full of dollar billionaires, who will spend these dollars - creating consumer spending, ie, inflationary purchasing power.  It would be too much to say this would be a good outcome for everyone, but it would certainly be a good outcome for those in debt.

Moreover, a healthy macroeconomic system with a fixed currency supply will not create a debt bomb.  Debt bombs are created when unpayable debts are guaranteed, formally or informally, by governments who want to profit surreptitiously from seignorage - generally, in the 20C, as part of some scheme to increase consumer spending.  USG itself cannot mint BTC.  So it cannot dilute the BTC supply with bogus BTC which are half bad debt, half "FDIC put."

It's also true that during the transition to BTC, no debt will be produced and there will be no significant BTC financial system.  Real debt requires the power to profit by selling future currency for a discount against present currency.  In a USD economy in which BTC is rising at 5% a day, or whatever, there is no way to complete this loop.

The "deflation" of BTC against USD is simply a function of the shifting volume of savings between the two currencies.  At present, almost all savings are in USD (and friends).  As tiny amounts of this energy flow into BTC, BTC goes up like a rocket.  Of course, the contest is unstable.

But when the entire savings pool has flowed into BTC, leaving the demonetized USD priced as a financial instrument for its expected return in BTC (ie, a dollar is a share of stock in USG, which has lots of awesome assets but no cash and no profits), you have an extraordinarily stable financial structure.  The quantity of BTC is fixed, by math.  The energy in savings is stable, because it corresponds to the real collective desire to defer consumption.  Even the debt capitalization is stable, because the quantity of debt depends on the existence of real productive opportunities.  I believe quite strongly that in this economy, there would be no such thing as a business cycle.

Sadly, I fear we'll never know, because Bitcoin is probably going to be killed by the USG.  Not really for any good reason, not even in self-defense, but just because it's easy to kill and bureaucrats like killing things.

This is the best thing about being a mouthpiece for power.  Your predictions come true.  You argue that the abandoned church next door is a dangerous firetrap, will probably burn down, and should probably burn down before someone moves into it.  It burns down.  Good, you say!  Are you a master thinker?  Or just good friends with a master arsonist?

Power creates opinion.  If Bitcoin goes from a billion-dollar capitalization to zero, which will happen if Washington so much as squeezes lightly on its neck, it's a bubble.  The past is always perceived as inevitable.  Everyone who bought Bitcoin will feel like the world's biggest chump.  How could anyone have thought it was worth something?  When, obviously, it was worth nothing?

No, it's a pity we can't use actual thoughts as a currency.  The quantity is so limited.  And always will be.  Alas, pseudo-thoughts are everywhere and very difficult to distinguish from the real goods.