When Hal Finney is right, you’ll be rich

Friday, 11 January 2019
London, UK
By Sam Volkering

  • When is the real birthday?
  • Run on the banks could be good for business
  • Nakamoto and Finney had the crystal ball

3 January 2019 was the official ‘birthday’ of bitcoin. Well, at least it’s one of bitcoin’s birthdays.

On 3 January 2009 Block #0 was entered into the bitcoin blockchain. This would be its ‘genesis block’. It was six days later on 9 January 2009 that block #1 would be mined.

The mining of this first block can also be considered a birthday of bitcoin. It’s the first instance that proves the operation of bitcoin’s blockchain. And it’s the first instance where 50 BTC were sent to the miner as a reward.

But perhaps most people really missed the real birthday of bitcoin. If you want to know about the first instance of the idea of bitcoin reaching others, then you actually need to go back to Friday, 31 October 2008 at 2:10PM EDT.

That was the first time an email was broadcast to a cryptography mailing list with the subject: Bitcoin P2P e-cash paper. Sent by Satoshi Nakamoto.

What ensued over the next few months was a robust discussion about the idea, the protocols, how it would work, the potential blowback, and the advantages and disadvantages of bitcoin.

Another interesting part of these threads is a post from Nakamoto on 17 November 2008 when, writing in response to questions on bitcoin, he said:

I believe I’ve worked through all those little details over the last year and a half while coding it, and there were a lot of them.

From that we could almost assume that the first code Satoshi wrote for bitcoin started back in May 2017. Maybe that’s the true birthday of bitcoin?

Nonetheless, what’s fascinating about this thread is that most people have never read it. People know about bitcoin, they’ve maybe heard about Satoshi’s original whitepaper, and maybe even read it (although I doubt most have).

But if you ask someone if they have read the email thread between Nakamoto, Hal Finney, James A. Donald, Ray Dillinger, Jonathan Thornburg, Bill Frantz and others, the answer is more than likely going to be a resounding ‘no’.

The question then should be: why not? This is the very early foundation of bitcoin and its implementation. And it’s only when you read through these emails — as well as the original Nakamoto whitepaper — that you start to understand why bitcoin exists.

And funnily enough, you see that the likes of Finney actually hypothesise how significant and world changing this novel idea might just be…

Markets

Overnight the Dow Jones Industrial Average closed up 122.80 points, or 0.51%.

The S&P 500 gained 11.68 points, or 0.45%.

In Europe, the Euro Stoxx 50 index finished up 5.49 points, or 0.18%.

Meanwhile, the FTSE 100 rose 0.52%, and Germany’s DAX gained 28.27 points, or 0.26%.

In Asian markets, Japan’s Nikkei 225 is up 182.46 points, or 0.90%. China’s CSI 300 is up 0.087%.

In Australia, the S&P/ASX 200 is down 12.80 points, or 0.22%.

On the commodities markets, West Texas Intermediate crude oil is US$52.50 per barrel. Brent crude is US$61.53 per barrel.

Turning to gold, the yellow metal is trading for US$1,292.35 (AU$1,790.70) per troy ounce. Silver is US$15.69 (AU$21.74) per troy ounce.

One bitcoin is worth US$3,584.10.

The Aussie dollar is worth 72.15 US cents.

Proof of funds

In one part of the original Bitcoin P2P e-cash paper thread James A. Donald writes (after very well thought out critique of bitcoin over a number of entries):

‘…it is very attractive to the libertarian if we can design a mechanism that will scale to the point of providing the benefits of rapidly irreversible payment, immune to political interference, over the internet, to very large numbers of people.

That idea of it being ‘immune to political interference’ is crucial. That is one of the core benefits of bitcoin, or any decentralised payment or e-money system.

And it’s never been as important as it is today.

Over in France you might have heard about the ‘yellow vest’ protests. These protests are continuing into their third month. The movement is motivated by rising fuel prices and other contributors to a high cost of living, as well as claims that a disproportionate burden of the government’s tax reforms were falling on the working and middle classes.

The protestors have by and large been violent and disruptive. But they’re now planning on being disruptive in a far more effective way. The latest idea is to create a run on the banks.

A group of protestors are calling on others to withdraw their money from the banks on Saturday, 12 January. The idea is to create a run on the banks and to leave them short of deposits.

While we don’t expect there to be enough people to actually put the banks under any real stress, this might just be the first attempt at this. If they could mobilise hundreds of thousands — perhaps millions — of French to do the same, then things would get extremely tricky.

The banking system operates fractionally. That means there’s never actually enough money in the system, should everyone want to withdraw all their cash at the exact same time.

Banks only hold a fraction of the money deposited with them. For example if they have $1 billion in deposits they would only actually hold say $200 million in real deposits.

Now if everyone that deposited their money with the bank wanted to withdraw their $1 billion collectively, the bank wouldn’t have enough to give everyone their money. This is what we call a run on the bank. Often a severe enough bank run can close a bank or put a halt to withdrawals.

Quite simply, the money you think you hold in the bank doesn’t really exist. At least not in a fractional banking system, if everyone wanted their money at once. So why shouldn’t we put them under the microscope and get them to provide ‘proof of funds’?

This too is why the idea of bitcoin is so powerful. At any given point in time, your bitcoin will always be worth exactly what it’s worth. One bitcoin today will be one bitcoin tomorrow, not a fraction of it. If you ever want to move it, send it or spend it, you can do so without having to get the permission of a ‘trusted’ third party like a bank.

With bitcoin, you are your bank. And if we see this proof of funds testing of banks become more popular, we could also see an increasing shift to bitcoin as the alternative to the current messed up fractional banking system.

Remember there can never be a run on bitcoin, because of its design.

This idea of limited and definitive supply is something Hal Finney was intrigued about early on in the bitcoin debate. After Satoshi Nakamoto released the alpha version of bitcoin, Finney replied to the cryptography mailing list:

It’s interesting that the system can be configured to only allow a certain maximum number of coins ever to be generated. I guess the idea is that the amount of work needed to generate a new coin will become more difficult as time goes on.

One immediate problem with any new currency is how to value it. Even ignoring the practical problem that virtually no one will accept it at first, there is still a difficulty in coming up with a reasonable argument in favor of a particular non-zero value for the coins.

As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world.  Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.

So the possibility of generating coins today with a few cents of compute time may be quite a good bet, with a payoff of something like 100 million to 1! Even if the odds of Bitcoin succeeding to this degree are slim, are they really 100 million to one against? Something to think about…

An interesting thought experiment indeed. And maybe one day Finney will be right?

The point is when you go back right to the start, you read the debate about bitcoin, you read the problems Nakamoto and the early contributors were trying to solve. You see they weren’t in this to get rich. They weren’t in it to fleece the ‘bigger fool’ out of their hard earned.

They were in it to build a P2P system outside of government control, better than a fractional banking system. They weren’t in it to screw people over — they were in it to save people from a system that had been screwing people over for centuries.

Nakamoto sums it up when he wrote on 16 January 2009:

‘I would be surprised if 10 years from now we’re not using electronic currency in some way, now that we know a way to do it that won’t inevitably get dumbed down when the trusted third party gets cold feet.’

To date, Nakamoto and his contributors have been right. Our view is they’ll continue to be right. And over the next 10 years maybe Hal Finney’s thought experiment will be right too. If he is, then you’d want to have at least one or two bitcoin in your holdings, we’d think.

Regards,
Sam

PS: If you want to head ‘down the hole’ then we suggest going to the following links to read through the original threads on bitcoin from Nakamoto and others before bitcoin’s launch, and immediately after it. It makes for outstanding debate and helps paint the picture of bitcoin’s history and its future potential.

http://www.metzdowd.com/pipermail/cryptography/2008-October/ http://www.metzdowd.com/pipermail/cryptography/2008-November/
http://www.metzdowd.com/pipermail/cryptography/2009-January/