BitCoins: an unpolicable p2p e-currency?

Paul Raven @ 16-05-2011

I’ve got a whole bunch of stuff that needs to get done over the next few days, so blogging here will perforce be of the drive-by link-drop variety for a few days or so. Today’s nugget of interest is BitCoin, a peer-to-peer electronic currency which, according to the folk behind the LAUNCH Conference at least, is “the most dangerous project [they’ve] ever seen”. Why so? Well…

Bitcoins are virtual coins in the form of a file that is stored on your device. These coins can be sent to and from users three ways:

1. Direct with peer-to-peer software downloaded at bitcoin.org
2. Via an escrow service like ClearCoin
3. Via a bitcoin currency exchange

Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.

The benefits of a currency like this:

a) Your coins can’t be frozen (like a Paypal account can be)
b) Your coins can’t be tracked
c) Your coins can’t be taxed
d) Transaction costs are extremely low (sorry credit card companies)

It’s a “technotarian”political statement, apparently… not to mention a grenade in the nation-state punchbowl. Here’s a cuddly and very contemporary-looking promo video:

Given the global discontent with banking and finance right now, BitCoins could look very attractive to a lot of people. Unsurprisingly, no “normal” financial system will let you buy them, and as the LAUNCH folks point out, legislation against them is inevitable. But would legislation be enough to stop them if enough people started bartering real-world goods and services for them? [Tip o’ the hat to Adam Rothstein]


The Anne Hathaway Guide to Stocks and Shares

Paul Raven @ 21-03-2011

Depending on how you look at it, this is either a harbinger of the emergent-model AI Singularity or a demonstration of the specious voodoo underpinnings of the automated financial markets… possibly both, if you’re a real pessimist [via Kottke.org].

A couple weeks ago, Huffington Post blogger Dan Mirvish noted a funny trend: when Anne Hathaway was in the news, Warren Buffett’s Berkshire Hathaway’s shares went up. He pointed to six dates going back to 2008 to show the correlation. Mirvish then suggested a mechanism to explain the trend: “automated, robotic trading programming are picking up the same chatter on the Internet about ‘Hathaway’ as the IMDb’s StarMeter, and they’re applying it to the stock market.”

[…]

Companies are trying to “correlate everything against everything,” [Bates] explained, and if they find something that they think will work time and again, they’ll try it out. The interesting, thing, though, is that it’s all statistics, removed from the real world. It’s not as if a hedge fund’s computers would spit the trading strategy as a sentence: “When Hathway news increases, buy Berkshire Hathaway.” In fact, traders won’t always know why their algorithms are doing what they’re doing. They just see that it’s found some correlation and it’s betting on Buffett’s company.

Now, generally the correlations are between some statistical indicator and a stock or industry. “Let’s say a new instrument comes to an exchange, you might suddenly notice that that an instrument moves in conjunction with the insurance sector,” Bates posited. But it’s thought that some hedge funds are testing strategies out to mine news and social media datasets for other types of correlations.

Crazy, right? Well, irrational on one level, perhaps, but those trading algos are big (bad) business: remember the guy who was accused of stealing some algo code from Goldman Sachs? Eight year stretch [via BoingBoing].


Goldfacebookman: bubblenomics ahoy!

Paul Raven @ 06-01-2011

So, Goldman Sachs is investing in Facebook. Lots of furore in the media: Facebook’s worth US$50billion, you know! Well, given recent events, I’m not sure I’d trust Goldman Sachs to accurately value anything other than their own scaly skin, but there you go. My cynicism is largely uninformed and instinctive, but smarter folk than I are looking beyond the gloss:

… you can look at the economics and note that Goldmans is buying under 1% of an illiquid stock, thus valuing the whole 100% at $50bn, and that to justify such a valuation at maturity (at say c 5x revenue valuation, like Google) would imply revenues of $10billion. Given that it already claims c 500m users (1/8th of the world’s online population, because as we know, there are no false accounts on Facebook) it is hard to believe much more than a doubling of users, so say 1 billion users. So, $10 bn over 1 bn users is $10 per user per annum (vs c $4 today), or say $1 / month. Sounds possible, except you have to remember that many users hardly use the system, and social media ads tend to have CPM in the fractions of pennies, so you are having to believe they can ship hundreds of thousands of Ads to each person each month, or can sell online goods – ie demi-freemium funding – but that typically only attracts c 5% of users, so you are looking at $20 per month per paying instead.

My take – Don is right, the good assets are expensive, but $50bn is a valuation based on a microstake. Goldman Sachs are not fools, but this is basic bubblenomics – and bubbles are built on the Bigger Fool Theory, ie there will be bigger fools who will buy these shares from Goldman. When you see private Facebook shares being sold to the “Man on the Street” its time to run for the hills.

Here’s the kicker:

The one sure thing you can tell from this is that Facebook clearly can’t self fund itself enough for what it needs, even on $2bn turnover a year.

And here rephrased by Ian Betteridge:

A web site which has 500 million users, 1/8th of the entire population of the Internet, doesn’t have a business model capable of supporting itself.

Ouch. More interesting still is that Goldman are inventing some brand new voodoo finance stunts specifically for this gig:

What Goldman Sachs is proposing to do is create a $1.5 billion, so-called “special-purpose vehicle” — a term that could only have been conjured on Wall Street — that would allow its high-net-worth clients to invest in Facebook.

The participants in Goldman’s Facebook “special-purpose vehicle” would not be considered Facebook owners “of record,” but rather “beneficial” owners. In other words, for the purposes of the Securities Exchange Act, Goldman’s Facebook “special-purpose vehicle” would constitute one owner “of record,” no matter how many Goldman clients participate.

Thus, it would appear that Goldman Sachs and Facebook are attempting to avoid SEC disclosure rules and allow Facebook to remain private for as long as possible, but still make it easy for Goldman’s rich clients to invest in the company.

The SEC is apparently keeping an eye on things, but you’ll forgive me, I hope, for not taking that as an assurance that some seriously shady shit won’t go down anyway. Are our memories really so short? Ooooh, look – shiny!


What’s Wall Street good for?

Paul Raven @ 23-11-2010

Following on rather neatly from yesterday’s suggestion that the “developed” economies may in fact be overdeveloped to the point of being detrimental to the overall good of society, here’s a lengthy piece at the New Yorker about Wall Street, investment banking and social good, which seems to reiterate a similar point: investment banking and securities trading isn’t actually beneficial to anyone other than the bloated financial sector itself [via MetaFilter].

It’s good to see people from within that sector starting to say so; whether we get things fixed before the next blow-out is another question entirely. A long article, but well worth the read.


Emerging markets less risky than developed economies?

Paul Raven @ 22-11-2010

Via Global Dashboard, speculation that a pretty fundamental shift in global economics may be under way*:

… could the emerging world now be a destination for those looking for security? That is what the credit markets say. Either they are wrong and emerging market credit is in an incipient bubble, or we need to turn received wisdom on its head.

[…]

What is fascinating is the market’s comparative judgment of the risk in emerging markets. Insuring against a default in China is exactly as expensive as in the UK – 0.6 per cent. The list of countries deemed safer than Italy (1.82 per cent) includes Mexico, Brazil and Chile, Russia, and even Indonesia (1.39 per cent).

This relative judgment on the emerging world has completely reversed in the two years since the aftermath of the Lehman Brothers bankruptcy seemed likely to tip over into an emerging market debt crisis. Then, insuring against an Indonesian default cost 12.47 per cent.

Back then, emerging markets were victims of a “risk off” trade. Investors got out as quickly as they could. This time, in spite of no shortage of true panic about sovereign debt in the eurozone, investors are not responding by selling emerging market debt.

The obvious explanation is “it’s a bubble!”, but the article goes on to suggest that it’s the very lack of financial sophistication in developing economies that may make them safer – a lower likelihood of speculative trader voodoo taking down entire countries, for example.

… this is not just about avoiding the west; emerging markets have advantages. They do not have expensive welfare states, so it is easier to keep their fiscal houses in order. They have less heavily developed financial sectors and banks that for the most part did not go overboard in the way that they did in western Europe and the US. Ireland’s banking sector grew far too big for its government to be able to rescue it without pain. If you want to avoid such risks, put your money in places such as Indonesia and Brazil.

I’m no economist, of course, so I’m not going to call it either way, but I think it’s interesting to consider the possibility that the “developed” economies are actually overdeveloped, a dead-end branch of excessive complexity on the tree of economic evolution.

[ * That link will probably smoosh you straight into the FT’s paywall, but if you Google one of the paragraphs above and click the correct link from the search results, you’ll be able to read the article in full. ]


Next Page »